There can be many advantages to starting your small business with a partner; sharing your responsibilities with another individual who's equally invested in your mission and goals can be highly beneficial. However, without careful planning and strategic thinking, a partnership could quickly become a burden for your business and even lead to its dissolution.
If you're considering starting a business partnership, think through this list of potential pros and cons before making your decision. You should also consider consulting with an attorney to help get this important step in the growth of your business correct and address any issues at the outset.
What is a Partnership?
A partnership can consist of two or more parties, and it involves making an agreement about how a business will be operated. There are three types of partnerships:
1. General Partnership
Each party who's involved in a general partnership shares responsibility for the small business. This includes liabilities and management as well as assets and profits. A key advantage of this type of partnership is that forming a general partnership is typically less expensive and less complicated than forming other types of partnerships. A general partnership also allows each partner to file their business tax income, deductions, and credits on his or her individual taxes. As a result, there is usually no taxation on the small business itself.
2. Limited Liability Partnership (LLP)
Like a limited liability company (LLC), an LLP allows each partner to assume limited liability, meaning that the individual partners typically aren't responsible for negligence of another partner. All profits and losses are passed through to the partners, and the partnership can opt between a centralized or decentralized management system.
3. Limited Partnership
In this type of partnership, there's at least one general partner and one limited partner. The general partner participates in the management of the business and assumes full liability of the partnership obligations. The limited partner does not participate in the management of the business and assumes limited liability. Often, the limited partners in these types of partnerships are investors.
Pros and Cons of a Partnership
Sharing the responsibilities of running and growing a business can come with a variety of advantages. You've most likely heard the saying, "Two heads are better than one." However, a partnership can be a good or bad thing for your small business based on your specific circumstances and who the partnership involves. Here are a few pros and pitfalls to consider.
Possible advantages of a partnership:
- The ability to raise capital and borrow money may increase
- Responsibilities and work may be shared
- Risks and expenses can generally be shared
- Creative brainstorming may be influenced in a positive way
Possible disadvantages of a partnership:
- There may be limitations that prevent your small business from growing beyond the partnership
- Profits have to be shared with all partners
- The potential for disagreements can arise
- Decisions may take longer with multiple decision makers
Safeguarding Your Partnership
If you opt to develop a partnership, you can help safeguard your small business with a written agreement or "business prenup" that will protect you if one of your partners decides to leave. This agreement should address the course of action you'll take if a partner wants to retire, passes away, suffers a long-term illness, has to file for bankruptcy, goes through a divorce, or experiences another problem that limits their ability to further participate in the partnership.
Weighing the advantages and disadvantages of forming a partnership can be a challenging task. By considering each of your unique needs as a small business owner, you'll be better equipped to make the decision that's right for you. When you're ready to insure your new partnership, ask AmVenture Insurance Agency, Inc. to help you find the insurance policies that will help limit your liability even more and keep you and all of your partners protected.