Going into business with another person has advantages and disadvantages, and working with a partner may or may not be beneficial to you and your company. If you’re starting a new venture or thinking about restructuring an existing company, consider the following points before determining whether to bring a business partner into the mix or fly solo.
How a small business partnership works
A partnership is a specific type of legal agreement that involves two or more individuals going into business together with an aim to make a profit. In a partnership, partners typically pool money, skills, and other resources to build and grow the business, as well as share management responsibilities, profits, and losses.
Partnerships are similar to sole proprietorships or independent contractor businesses in that the business is not a separate entity from the owners. This means that each partner is personally responsible for debts and liabilities incurred on behalf of the business by other partners.
Tax treatment is one of the biggest advantages of a partnership structure. Rather than paying taxes on the business income, a partnership passes through any profits or losses to the individual partners based on their agreement. At tax time, the partnership must file a tax return that reports its income and loss to the IRS, and each partner will report his or her portion of income and loss.
Types of partnerships and partners
If you choose to structure your business as a partnership, you’ll need to decide which type of partnership is the best fit. Partnerships come in two main varieties: general partnerships and limited partnerships.
In a general partnership, partners participate in the day-to-day operations of the business and are liable for debts or legal obligations.
In a limited partnership, one general partner manages the company and assumes liability, while one or more limited partners serve as investors but do not participate in business operations or have liability.
Due to the required filings and administrative complexities, limited partnerships are typically not the best option for new businesses unless several passive investors are expected to be involved. When two or more partners want to be actively involved in the business, a general partnership is usually a better choice, as it is much easier to form.
There are also various options for types of partners within a partnership. In addition to the general or limited partners mentioned above, a partnership may also include salaried partners, who are paid as employees, or equity partners, who have a share in ownership of the company.
Further, a partnership can include distinct partner levels, such as senior and junior partners, who each have separate responsibilities, degrees of control and input, and investment stakes.
The pros and cons of partnering up
If you’re thinking about forming a partnership, it’s important to weigh both the positive and negative aspects of bringing on a partner.
The advantages of a partnership:
- Greater depth of skills and expertise: If you find a partner whose background differs from your own, he or she will bring a whole new set of skills, knowledge, and expertise to the table. The combined skillset of your partnership and business more well-rounded and help take your company to the next level.
- Financial assistance: When you work with a partner, you don’t have to take on the financial risk of starting a business on your own. Instead, you’ll have someone to help put up capital or obtain a business loan with and share in the actual cost of starting the business.
- More manpower: Bringing a partner into the mix means that you have an extra set of hands to share the workload with, which likely means that you’ll be able to get things done quicker and improve your work-life balance.
- New ideas and perspectives: A partner can bring a fresh outlook to the business and provide ideas, perspectives, feedback, and solutions that are different from your own, which can help you avoid tunnel vision and bad decisions, as well as grow the company to new heights.
- Outlet for discussion: When you have a partner, you have someone to bounce your own ideas off of, talk to about business issues, and share struggles and successes with.
- Additional networking opportunities: If you take on a partner, you’ll also have access to their network contacts, clients, suppliers, investors, and mentors, which can bring a whole new wave of opportunities for you and your business.
- Higher level of accountability: A partner can help keep you focused, disciplined, and motivated to meet goals and grow the business.
- Support system: Having a business partner can help you combat loneliness and provide you with someone to share the weight of running a business with. When the going gets tough, your partner will be there for you to lean on.
The disadvantages of a partnership:
- Profit sharing: Working with a partner means you don’t get to keep all the business profits for yourself—you have to split them with your partner. Additionally, you’ll need to determine how the profits will be split, whether it be equally, in line with how much effort is put in, or in accordance with some other arrangement.
- Loss of ownership and power: When you bring in a partner, you typically give up a portion of your own ownership, decision making power, and control in the business.
- Disagreements: Regardless of how well you and your partner work together, conflict and quarrel will arise at some point. If you and your partner butt heads too much or are unable to effectively work through differing points of view, this can lead to major trouble for the company.
- Difference in work ethics: If you choose to work with a partner, you run the risk of getting into business with someone who doesn’t work as hard as you or share the same passion and enthusiasm for the company.
- More complex decision making: The decision making process can be longer and more difficult when you have a partner. You may run into situations where company operations are hindered or you are unable to move forward on certain projects due to lengthy discussions or disagreements on business decisions.
- Accountability for losses: In a partnership, you take personal responsibility for whatever happens in your business, and this can include liability for your partner’s actions in some situations. If your partner causes financial trouble or does something illegal, you might be held accountable, too.
- Possible reputation harm: A corrupt partner can lead to distrust of your business, which can permanently defile your personal reputation as well.
- Potential damage to the relationship: If you choose to partner with someone close to you, like a friend or family member, you chance spoiling your personal relationship with that individual due to disagreements and misunderstandings in your business relationship.