Partnership Business VS Limited Company

By Ashfa Anwer

For most organizations, the ideal choice of a business structure is most likely a partnership business or a limited company. The right choice lies in each individual circumstance and it could depend on a number of different factors like legal requirements and tax considerations. Understanding the pros and cons of a business entity is important too as it’s an integral part of the process of business planning. Choosing the right option can ensure maximum efficiency for your business, as well as provide essential protections and allow your business to grow easily.

So, which structure is right for you? Here, we take a look at the definition of a partnership and a limited company, as well as the differences, and the advantages and disadvantages of each arrangement. 

What is a partnership business?

A partnership business is when two business partners share joint responsibility for a company unless a partnership agreement openly states otherwise. Partners are jointly responsible for both the profits and losses in a business. Both partners will also pay taxes on their share of profits. Partners will also have to share responsibility for all the debts and liabilities with the business, as well as any bills for assets like equipment and stock.

What is a limited company?

The main feature of a limited company is the legal separation of those who operate it. For instance, its directors are not liable for company debts and financial responsibility lies with a company’s shareholders. While the day-to-day operations of a limited company are the responsibility of its directors, such a company is legally owned by shareholders. Shareholders and directors may also be completely different individuals.

Generally, a shareholder’s liability is only proportionate to the price paid for their share in the company. If a limited company was to close down, a shareholder would only lose the amount paid for their shares.

In a nutshell, a limited company functions within its own right; it can own property, employ staff, and enter legal disputes as its own entity.

Partnership vs Limited Company – the big difference

The main difference between a partnership business and a limited company lies in the structure. For a young company, a partnership structure is often a more favourable option, especially when it comes to tax purposes. A limited company, on the other hand, needs to pay corporation tax on its income and also file annual returns.

If a partnership business is very successful, the partners involved can reap a significant financial benefit. However, it must be remembered that personal finances are on the line, and should the business go under, financial stability, whether it is savings or mortgages, is at a risk.

A limited company is a solid structure that is ideally designed for running a business successfully. It remains one of the most popular choices as it can provide clarity and protection that other business entities may not.

Partnership vs Limited Company – a breakdown

  • A partnership business is an agreement between two or more individuals who come together to operate a business and thereby, share the outcomes of this business among themselves. A company is an artificial entity having a separate identity, common seal, and perpetual succession which is formed and governed by law.
  • The registration of a partnership business isn’t compulsory whereas it is compulsory for a limited company to get a company registration.
  • For the formation of a partnership business, there should be at least two partners. For the formation of a limited company, there must be a minimum of two members and a maximum of 50 individuals.
  • In the case where a partnership dissolves, there are no legal formalities to be considered. A limited company, on the other hand, has to face a number of legal formalities before closing down.
  • A partnership business can be dissolved by any one or all of the partners whereas a limited company cannot be dissolved by any one or all of its members.

What you need to consider

In the end, the partnership business vs limited company decision may come down to convenience for most people. A limited company is a more complex entity than a straightforward partnership business. A limited company is operated by shareholders and directors ( who can also be the same individuals) and each of them has roles and responsibilities to uphold that have been defined by law. A limited company calls for filing requirements, publishing of annual accounts, and there are a number of other fees that have to be paid to run a limited company. These factors can increase the associated costs.

For a partnership business, all the partners involved will have joint liabilities and several other liabilities too. So, each partner is liable for the entire debt of the business in the event something goes wrong. This can mean that if you’re the only partner in the business with any resources to pay the debts of the business, and should it fail, all the liability can fall to you. It’s also worth bearing in mind that even when a partner leaves the business, they can still remain liable. Additionally, complications can also arise from sharing responsibility for the business and this may lead to internal conflicts.