When starting a business, you may have the option to either go it alone or form a business partnership. Both options have advantages and disadvantages, and the best one for your business depends on your unique situation. We spoke with business owners and legal experts to map out what you should consider when evaluating a business partnership opportunity.
Pros of business partnerships
A business partnership can be a desirable option for many reasons. The core benefits pertain to funding, taxation, division of labor, and knowledge.
- Access to capital. Perhaps the most obvious advantage to having a business partner is splitting the finances. Starting and running a business is an expensive venture, and when you share the financial responsibilities of a business with another individual or entity, you are at a greater advantage of getting your business off the ground. Partnering with one or more other business members (regardless of partnership type) can increase financial security and cash flow, and lower the stress of funding your operation.
- Taxation. Another advantage to a partnership is taxation. Most business partnerships are taxed as pass-through entities. Because of this, you file and pay taxes on your share of business ownership. This can reduce the burden of paying taxes on the entire business yourself.
- Division of labor. Just as partners can split the financial burden of a business, they can split the responsibility of operations as well. A business partner is someone you can share day-to-day business operations and major business decisions with (unless you operate under a limited partnership). Splitting up the responsibilities and duties of your business can help with efficiency and productivity, enabling you to accomplish more than you would alone. If you have a problem with your business, you have someone to consult with.
- Knowledge and expertise. Every business owner brings unique experiences and skills to the table. When you operate your business with a partner, you can benefit from their knowledge and expertise. It is ideal to have a business partner that excels in areas where you are lacking. Additionally, if you are a first-time entrepreneur, it can be beneficial to partner with a seasoned business owner who can help guide the business.
Cons of business partnerships
Operating a business with someone else is not always easy, and sometimes it can end terribly if you are not properly prepared. There are a few challenges to be aware of, primarily regarding profit, liability, and conflicts of interest.
- Informal arrangement. Partnerships allow for great flexibility, but this can be a problem as well. When setting up a partnership, it might be easier to just settle on a verbal agreement, but it is always best to sign a clear, written agreement for protection. Coming to terms about the percentage of ownership, liability, and responsibility can be difficult to agree on, which can cause setting up a partnership to take more time and money than you might have anticipated.
- Lower percentage of the profit. In contrast to the benefit of having additional funding, a business partnership can also yield lower profit per person. Since you will be dividing the profit of the business based on share of ownership, you must be okay with not receiving the full income that the business brings in.
- Partner liability. Depending on the type of business partnership you enter, you may be personally responsible for any actions brought against the company. You also may be liable for a mistake your partner makes. Liability is a big factor in partnership, so it is important that you trust your potential partner and enter a partnership that protects your best interests.
- Conflict. When you are running a business with someone else, you are bound to have occasional differences in opinion. If you and your partner have different work ethics, or have a disagreement you can’t resolve, your business can suffer immensely. This is especially true in cases of partnerships with family members or close friends, where personal issues can cloud professional judgement.