Corporate & Transactional
Pros And Cons Of Business Partnership Formation
When starting a business venture with another individual or a group of people, forming a business partnership may seem like the obvious choice. While it may appear to be the best avenue to take, it is not the only option. Thus, it is essential to review the benefits and drawbacks of every legal option when considering going into business with another person. Forming a business partnership has its advantages and disadvantages; understanding each is the best way to make a sound decision about which will benefit a business the most.
What Is a Business Partnership?
A business venture partnership involves sharing ownership of an organization or entity with others. According to the Internal Revenue Service (IRS), partnerships are business relationships between two or more people. Each partner contributes funds, property, or skills to the organization and shares in the profits and losses. There are three primary types of business partnerships, and they include:
- Limited partnerships
- Limited liability partnerships
- General partnerships
According to information provided by the United States Small Business Administration, the business structure a party or group of people chooses will significantly influence every part of the business. It will affect daily operations, liability, taxes, and potential risks and benefits. New business owners must determine the structure that grants them the protections and balances they require.
The Advantages of A Business Partnership Formation
There are many benefits to forming partnerships. One advantage is that partnerships require less paperwork and funds than developing a new corporation does. However, there are a few other practical benefits as well.
Sharing Responsibilities of Running the Business
Sharing responsibility for the business allows the partners to focus on and make the most of their skills and abilities. Partners often decide to split roles and responsibilities based on skills, experience, and background.
More Knowledge, Skills, and Experience
Partnering with one person or a group allows access to a vast range of skills and experience. Extra support and knowledge are often vital when deciding which type of business to form. One of the partners might excel in an area that another does not have extensive knowledge of or lacks a background in altogether. This can help to bridge the gap of expertise.
The Partners Carry Less Financial Burden
Partnership formation also means carrying the less financial burden. Instead of one person covering the costs alone, the partners can split the business expenses required to open a new company.
Some other pros of business partnerships include the following:
- More contacts and business opportunities
- Better work and personal life balance
- More input and additional perspectives
- Additional support during the busy and often stressful time of opening a new company
The Disadvantages of Business Partnerships
While company venture partnerships do offer several benefits, there can also be disadvantages.
Sharing Control with Partners
Successful partnerships require compromises and decisions that all partners may not agree with. Sometimes, this may mean making a decision that not all are partners are happy with for the sake of the joint venture. Partners must be able to put themselves in each other’s shoes and listen even in disagreement. A business partnership may prove challenging if one individual is used to making business decisions independently.
The Potential for Disagreements
Conflicts may arise quickly when those in the partnership cannot come to an agreement and will not compromise. Issues can also occur when a partner does not seem to be taking on their share of responsibilities. Disagreement can be a source of problems and stress within the partnership. When forming a partnership, choosing those with values and a similar vision for the company’s direction is critical.
Sharing Partner Liability
While sharing the financial burden can be a benefit of forming a business partnership, it can also be a negative aspect. If one partner makes economic decisions that are detrimental to the business, everyone involved in the company’s ownership is liable for those choices.
Alternatives to a Business Partnership
Some entrepreneurs do not want to work alone but are also unsure if forming a business partnership is the correct path. In these cases, there are several alternatives to consider.
Co-working space involves working side-by-side and camaraderie with others to share ideas and objectives. However, despite working in the same space, the individuals run different businesses or can work as independent contractors for the same client. For example. A co-working space could have two businesses in similar industries but with separate professional purposes.
Join a Mastermind Group
A mastermind group involves peer-to-peer mentoring and is excellent for helping with problem-solving and gathering input. These professional groups have regular meetings and are a great way to meet new contacts or learn about various business strategies. They often include a group of like-minded individuals with similar goals who can provide feedback from different perspectives.
Two or more individuals can create a strategic partnership. This will offer the same advantages of a business partnership but without legal and financial obligations or long-term commitment. A strategic alliance is also an excellent way to determine how well a group works together before deciding on a partnership formation.
An organization partnership can be highly beneficial for many company owners. It allows each partner to organize and share the work needed to launch a successful business. However, business partners can quickly face challenges without careful planning and preparation. Sometimes, these challenges may lead to closing the company altogether. Understanding and weighing every advantage and disadvantage of forming business partnerships can be complex.
The process is often lengthy and challenging for future business owners. It is vital to consider each type of entity formation and the unique circumstances the company may face in the future.