Business Structure: Partnerships
Is a Partnership the Right Business Structure for You?
Sep 16, 2008
The most popular business structure is a sole proprietorship, and for good reason -- it is faster, easier and cheaper to set up than any other business structure. However, one of the drawbacks of being in business by yourself, for yourself, is becoming isolated and lonely. A business partnership not only solves this dilemma, but it also provides more flexibility and freedom for some business owners.
But like any business structure, a partnership can either be a dream come true or your worst possible nightmare. Therefore, before you endeavor into the world of entrepreneurship with a business partnership, it would be wise to consider the following information.
What Is a Business Partnership?
Before getting into what to discuss with your potential business partner, let's first define a business partnership: A business structure that joins two or more people in a legal partnership. Each person who owns a portion of the business is called a general partner. The business in and of itself does not pay income taxes, but rather each person who takes a draw from the business profits will file their taxes and pay income tax on that amount.
The Benefits of a Business Partnership
There are several benefits to using a partnership business structure. They are:
- Best Use Of Resources: Instead of a sole proprietorship where one person does everything, a partnership can divvy up the business responsibilities between partners, ensuring each individual's strengths are catered to.
- Financial Allocation: Not all partners have to assume the same amount of responsibility as others. In a general partnership, all parties have equal liability, meaning that if the business should fail, all parties will lose the same amount of money/be responsible for the same amount of loss, with no limit. But in a limited partnership, one or more parties are only responsible for the amount of money that they've invested into the business.
- Flexibility: Although many business partnerships use a 50/50 split when it comes to deciding who is responsible for the final decision making, but it is well advised to at least use a 49/51% split instead. Or, the general partners can ask for advice from an appointed board to make decisions that are contentions between the two partners, ensuring that everyone is heard and equally
The Disadvantages of a Business Partnership
As with every business structure, there are both advantages and disadvantages. For a business partnership, the not-so-hot aspects are:
- All business partners must agree on the focus with which the business will take. While this initially may seem quite straightforward, it is the main reason why many partnerships fail. Make sure that the two (or group) of you discuss both your short and long term business goals before starting a partnership together and you'll have won half the battle.
- If all partners do not spell out the terms of a business agreement (each state differs as to whether or not this is required, but in any circumstance it is highly recommended), there is ample leeway for one (or more) partner(s) to be taken advantage of. Creating a partnership agreement before you start your business will assist greatly in diffusing and potential debates.
Creating a Partnership Agreement
For those who have decided that a business partnership is the way to go, here is a list of things to discuss with your general partners. Make sure to have all in writing and reviewed by a lawyer before moving the business forward.
- Authority
- Management
- Capital Contributions
- Funding
- Profit and Loss Allocation
- Partner Salaries, Benefits and Compensation
- Buyouts: What if one (or more partners) want out? What if someone passes on or gets sick?
- New Partners: What if someone wants to join the partnership?
- Business Organizational Structure
- Dispute Settlement How-To
- Length of Partnership
For More Information About Business Structures...
Think a partnership isn't the right business structure for your entrepreneurial venture? Then take a peek at the pros and cons of sole proprietorships, limited liability companies and corporations.
