Feb 13, 2019

Taking on a Partner: Is It the Right Move for You and Your Business?

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:

The disadvantages of a partnership:

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About the author

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Sarah Hancock
Sarah Hancock is the Chief Editor of the Best Company business loans blog. She frequently writes about business-related topics and has contributed to Forbes, Reader's Digest, Yahoo, Ladders, MyCorporation, Fit Small Business, and several other publications.

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