Partnerships (Cambridge International IGCSE Accounting)

Partnerships

What is a partnership?

• **A partnership **is a business in which two or more people operate as owners with the main purpose of making profits
• Normally a partnership consists of** two to twenty partners **
• Sometimes a partnership is formed when a** sole trader** wishes to expand or grow their business
• Two or more sole traders may decide to combine their resources such as money and assets to form a new business

What are the advantages of operating as a partnership?

• Forming a partnership is relatively easy as formal permission is not required to set it up

• Partners have access to additional finance because all partners contribute to raising the capital of the business

• Partners have access to each other's skills and expertise

  • For example, a makeup artist might partner up with a hairstylist

• Partners share the risks of operating the business

• Partners can cover each other for sickness and holidays

What are the disadvantages of operating as a partnership?

• Profits are shared among all partners

  • Unlike a sole trader who keeps all the profits, partners will share it

• Partners may find that they have **disagreements **

• Partners may take** longer to come to decisions** about the operating activities of the business due to them having different opinions

• All partners are responsible for the debts of the business

  • Even if the debt was only created by one of the partners

Exam Hint In the exam on the structured written paper, you may be asked to advise a sole trader whether or not they should form a partnership with another sole trader. You should state two advantages of operating a partnership and two disadvantages of operating as a partnership and then make a recommendation.