Question

2. Tom presently runs a business (as a sole proprietor) transporting pots and plants for wholesale garden nurseries. One of his clients who has a diversified business has just offered him a 12 month contract transporting cranes, forklift trucks and scaffolding between building sites in the CBD. He has a friend, John, who wants to join him in the business. They agree to combine their funds to purchase the specially fitted truck required for the job. They want to run the business as a partnership. Is this a good idea?

Answer 1

A partnership is an agreement between one or more persons to share the profits of a business carried on by all of them, or any one of them acting for all.

As compared to a sole proprietorship, there is greater access to funds in a partnership. And it is easy to form, and easy to dissolve. Compliance requirements are minimal.

Funds are needed to purchase the specially fitted truck, and Tom might not like to commit any more funds to his business. Also, borrowing for a proprietorship can be expensive. Therefore, the funds brought in by John would be welcome.

As the scale of the business is modest, running the business as a partnership is not a bad idea.

Moreover it is a 12 month venture, with no surety that there would be an extension of the contract. Therefore, the partnership can be dissolved by mutual consent without much ado once the contract is completed. Putting an end to an incorporated entity could have been problematic.

Partnership also provides the opportunity of sharing of risk. If it turns out to be a profitable venture, both Tom and John can enjoy the spoils. On the other hand, if it is a loss making one, they can mitigate individual loss by sharing.

But Tom must remember one thing, i.e, the liability of either partner would be unlimited. Even their respective personal assets would be liable for paying off the debts of the partnership.