There are many advantages to starting a business with someone else. Working with a partner can be very beneficial for you and your company. Before deciding whether you want to partner with a business partner or go it alone, think about the following.
How Small Business Partnerships Work
A partnership refers to a type of legal agreement in which two or more people enter into a business with the aim of making a profit. Partners often pool their money, skills, or other resources to help build and grow the company. They also share in management responsibilities such as profits and losses.
Partnerships are not separate entities from their owners and are very similar to sole proprietorships and independent contractor businesses. Each partner is responsible for any liabilities or debts incurred by the business on behalf of other partners.
A partnership structure offers tax treatment as one of its greatest advantages. A partnership does not pay taxes on business income. Instead, it passes any profits or losses to each partner based on their agreement. The partnership must file a tax report that reports its income to the IRS. Each partner will also have to report their share of the income or loss.
Types of Partners
You will need to choose the right type of partnership for your business if you decide to form it as a partnership. There are two types of partnerships: limited partnerships and general partnerships.
General partnerships allow partners to participate in the day-today business operations and they are responsible for any legal or debts.
A limited partnership has one general partner who manages the company and assumes all liability. One or more limited partners act as investors, but they do not participate in the business operations or are liable.
Limited partnerships are not the best choice for new businesses due to the complexity of the filings and administrative requirements. This is unless there are several passive investors. A general partnership is a better option if more than one partner wants to participate in the business.
You have many options for types of partners in a partnership. A partnership can also include salaried partners who are employees or equity partners and have a share of the company’s ownership.
A partnership can also include different partner levels such as junior and senior partners who have their own responsibilities, control and input and investment stakes.
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The Benefits and Drawbacks of Partnering Up
It is important to consider both the benefits and drawbacks of joining a partnership if you are thinking about it.
The benefits of a partnership:
- Greater expertise and depth: A partner with a different background than yours will bring a whole range of skills, knowledge, and expertise to the table. Your partnership’s combined skills will make your business more successful and allow you to take it to the next level.
- Financial assistance: Working with a partner means that you won’t have the financial risk of starting your own business. Instead, you will have someone to assist with capital raising or obtaining a loan for the business.
- Increased manpower: A partner can be added to your team, giving you more hands to help you get the job done. This will likely increase productivity and enhance your work-life balance.
- You can get new ideas and perspectives from a partner. They can offer new perspectives and ideas to your business, provide feedback and suggestions, and help you avoid making bad decisions and tunnel vision.
- Outlet for discussion: A partner is someone you can bounce ideas off, talk about business issues and share your successes and failures.
- Additional networking opportunities: Partnering with a business partner will give you access to their contacts, clients and suppliers as well as mentors. This can open up new opportunities for your company and help you find the right people and resources that you need.
- Partner can provide a higher level of accountability. They will help you stay focused, disciplined and motivated to achieve your goals and grow the company.
- A business partner is a support system. They can help you cope with loneliness and share the burden of running your business. Your partner will always be there to support you when things get tough.
The downsides of a partnership:
- Profit sharing: You can’t keep all the business profits. Your partner must share them. You will also need to decide how profits will be divided, whether it is equally, according to how much effort was put in or in accordance any other arrangement.
- You lose ownership and power when you bring in a partner.
- Disagreements: No matter how well you work together, there will be times when your partner and you must disagree. This can cause serious problems for your company if you and your partner argue too much or fail to work together to reach a common understanding.
- Different work ethics: You run the risk that you will be working with a partner who isn’t as dedicated to the company or doesn’t share your passion for it as you.
- Complex decision making: Having a partner can make the decision-making process more complicated. There are situations when company operations can be hampered, or projects are not able to proceed due to long discussions or disagreements about business decisions.
- Losses and accountability: As a partner, you are responsible for all that happens to your business. This can also include responsibility for the actions of your partner in certain situations. You could also be held responsible if your partner causes financial problems or commits an illegal act.
- Potential reputation damage: A corrupt partner could lead to distrust in your business. This can also permanently harm your personal reputation.
- Potential damage to the relationship
Is a Partnership Right for You and Your Business?
A partnership may be an option for small businesses to get additional funding to grow their business. This decision has its pros and cons. If funding is your only motivation for adding a partner, then perhaps other funding options are better.
Progressive Business Capital provides multiple funding options to help your company solve financial problems. It’s easy to apply online. You can also call 800 508-4532, or email [email protected] for more information about funding your small business.
