Advantages and Disadvantages of Partnership and Private Limited Company

Often perceived as more prestigious than partnerships, there are some disadvantages of a private limited company over a partnership. However, while there may be some drawbacks, both business types offer investors and shareholders quite a few advantages. If you’re looking at starting a business, knowing the pros and cons of both can be beneficial in helping you reach an informed decision.

Advantages of a partnership

A partnership consists of two or more individuals with a common business purpose and who share company decisions plus profits and losses. But apart from this, what are some of the benefits of a partnership in business?

1. Exemption from paying income tax – with a partnership, each partner files the business’ profits and losses through a personal income tax return. There is no heavy documentation that needs to be filled in such as a private company.
2. Setting up is a simple affair – a partnership can be formalised through a partnership agreement. This will require the introduction of a business name and both or all partners would need to register with HMRC for self-assessment tax. A business bank account will also be required.
3. Greater ability to raise funds – a solo entrepreneur may find themselves struggling to gain access to funding because their business model may not be backed by strong financial standing yet. However, a partnership enables the different partners to join forces and pool finances together to help the business take off.
4. Confidentiality, skills, expertise and knowledge sharing – since the nature of partnership does not require documentation for public inspection, its affairs can be kept confidential. In addition, partners can share skills, expertise and knowledge for the benefit of the business and enjoy joint decision-making.

Disadvantages of a partnership

Apart from these pros, however, there are also some disadvantages of a partnership firm and we explore these in some detail below.

1. Potential instability – if one partner chooses to withdraw, it can put the partnership in a state of instability as it is not possible to transfer an interest in the business without the consent of all the remaining partners. Finding a new partner to take the place of the withdrawing partner can be difficult.
2. Personal liability for business debt – because of this, if the business has creditors that seek to recoup the funds owing to them, the partners can be held personally liable for the business’ debts.
3. Joint and several liability – partners are jointly and severally liable for the obligations of the partnership. These can include contracts and breaches of trust. If a third party sues, the remaining partners will be responsible for settling the debts.
4. Difficulties in raising capital – due to the perception that partnerships are higher risk business entities, lenders may be reluctant to lend and, if they choose to do so, financing terms may be less favourable.

 Private Limited Company – Advantages

We now reach the benefits of being a private limited company. Let’s explore these in more detail.

1. Limited financial liability – this is limited to the shares held by each shareholder. It means that should the company face financial difficulties, none of the shareholders would risk their personal assets to cover outstanding company debts.
2. An incorporated business – this refers to the longevity of the company. Should the owner pass away or resign, the company will continue to exist and operate without their input or involvement.
3. Raising capital can be done fairly easily – this is achieved through the sale of shares.
4. Tax benefits – tax relief such as corporation tax can be lower than other business types. Subsequently, this offers greater scope for flexibility for tax planning.

Private Limited Company – Disadvantages

Are you wondering what are the disadvantages of being a private limited company? Let’s find out.

1. Public nature of documents – all audited annual returns and accounts must be submitted to the Registrar of Companies and these are available to the public. This is a legal requirement.
2. Set-up costs can be high – another one of the disadvantages of being a private limited company is that it can also be more time consuming and expensive to set up. The business owners will require professional assistance such as advice from legal experts.
3. Separation of ownership and control – as an owner of a private limited company, this does not necessarily entitle you to exercising control and making crucial business decisions. This is one of the fundamental disadvantages of a private limited company.

The sum total

When it comes to whether to opt for a private limited company vs a partnership, we hope you’re now a bit more informed about the differences between the two as well as each business type’s advantages and disadvantages. Whereas partners may need to submit personal income tax returns, private limited companies need to follow a more formalised structure. This is where you can rely on professional outsourced accounting services for either business type so that you can help your business grow.

Get Help from the Professionals

Looking for an accountant in London? Contact a trusted company that provides proficient outsourced accounting services to help you with tax planning – and give you expert accountancy advice.

Specialising in partnerships and small businesses you’ll get bespoke assistance with tax compliance, payroll, and bookkeeping needs and VAT return services. Whether you choose a business partnership or to be part of a private limited company your taxation and accounting will all be taken care of – and you can simply focus on your business growth.