Advantages, disadvantages of joint ownership

There are various forms of businesses such as sole traders, sole practices, partnerships, private business corporation (PBC), private companies, public companies, etcetera.

These types of businesses can conveniently be classified into sole or single ownership and jointly owned businesses. In this article, I look at the merits and demerits of jointly owned businesses.

Advantages or merits of jointly owned businesses

Pooling of resources

The most common advantage is the pooling together of financial resources. The different owners contribute financial resources in proportions and ways agreed upon by the joint owners. As a result, there will be more resources available to the business.

Unless a business has access to significant funding it may not grow. The importance of adequate funding cannot be overemphasised.

Combining skills

Another advantage, especially for owner-managed businesses, such as professional practices, partnerships, and small to medium companies is the combining of different skills.

In the case of say, lawyers, accountants, engineers or doctors the business owners may have different expertise or markets. This may give the business an advantage as the owners will be able to offer varying services or products based on their specialisation.

Checks and balances

Large businesses normally have defined governance structures and systems. These serve as checks and balances. Sole traders or practitioners are usually accountable to themselves.

Disadvantages or demerits of jointly owned businesses

Joint business ownership is not without problems. The main challenge of joint business ownership may come in the form of disputes largely on business ownership, governance structures and systems.

The challenges are explained below:

Disputes over ownership

Money is sweet and people always want more. Disputes over shareholding are usually if not always for purposes of ensuring one does not get less. Some shareholders may even fight for what they do not deserve. This problem may be addressed through adequate documentation such as through partnership agreements, share allotments agreements, share transfer agreements, and shareholders’ agreements.

Disputes on ownership may arise if some of the joint owners do not make full contributions towards their ownership claims.

For example, a partner may make part contributions for his or her partnership or a shareholder may fail to pay for all his or her shares.

Disputes over governance

These vary in form. For example, there can be fights over control of the business. In the case of companies shareholders can fight through the directors. If they are the directors, the shareholders can fight as directors during or outside board meetings.

They may even try to have control over management.

Different vision

It is possible for joint business owners to have different visions or strategic directions. Some owners may have a “tuckshop” mentality whereas others could be for growth. It is their ability to reconcile or converge that may see the company going forward. In some situations, such differences can degenerate into splits.

Financial issues

Joint business owners may approach financial matters differently. Some may want constant access to finances for their livelihood whereas others may have multiple sources of income or may have less commitments or conservative lifestyles.

It may also happen that a business may require additional funding and some owners may be unable or unwilling to contribute. They may resist funding from third parties through for example loans or issue of new shares.

Conflict of interest

Contracts or procurement may be another source of challenge where there is conflict of interest that is not declared. For example, there may be a temptation to deal with a supplier or service provider on terms that are prejudicial to the business but beneficial to some of the owners.

Conclusion

Joint business ownership has many advantages the main of which is the pooling together of large resources. However, jointly owned businesses may also have challenges in the form of disputes hence the need for adequate documentation of agreements and effective governance systems.

Disclaimer: This simplified article is for general information purposes only and does not constitute the writer’s professional advice. It is not targeted at anybody.

Godknows (GK) Hofisi, LLB(UNISA), B.Acc(UZ), Hons B.Compt (UNISA), CA(Z), MBA(EBS, Heriot- Watt, UK) is the Managing Partner of Hofisi & Partners Commercial Attorneys, chartered accountant, insolvency practitioner, registered tax accountant and advises on deal and transactions. He has extensive experience from industry and commerce and is a former World Bank staffer in the Resource Management Unit. He writes in his personal capacity. He can be contacted on +263 772 246 900 or gohofisi@gmail.com-herald