How to Choose the Right Business Partnership
Two is better than one, right? If you're a sole trader making your way in the business world, it's likely you've considered sharing some of the responsibility of your small business. Much like a monogamous relationship, a business partnership can be highly beneficial or detrimental to your small business, depending on the partner you pick. Be selective!
So, what is a business partner? How does a partnership affect your business?
What is a Partnership in Business? A Simple Definition
A business partnership is a structure in which two or more individuals are responsible for all aspects of the business. Each partner offers a special service or expertise. There are two main types of business partnerships.
General partnership: Partners manage the day-to-day business operations and assume liability (typically equally) as owners for any debt, lawsuits or other obligations the business may incur.
Limited partnership: Includes both general and limited partners, but the limited partners serve only as investors in the business and are not liable for the company's debts or losses.
A limited partnership is usually employed where the partnership responsibilities and roles are uneven. Therefore, if you're thinking about a limited partnership, consider the amount of involvement your limited partners will expect, as it's often directly proportional to the amount they invest.
The Financial Impact of Business Partnerships
Whether you like it or not, a business partnership will affect all areas of your enterprise. In fact, up to 70% of business partnerships fail. If you want to make sure your business partnership isn't just another statistic, you'll need to carefully screen the partner you plan to allow into your business bed.
Take it Slow
Besides couples in Vegas, most people don't jump into marriage — they first take time to get to know each other. If you want to find business partners who will grow your business, look into their past experiences and endeavours. It's important to know a potential partner's business history.
Even if the candidate hasn't been a partner before, conduct some research. For instance, meet with previous employers or coworkers to get a feel for how the person makes decisions, manages conflicts, and operates on an organisational and financial level.
If you haven't worked with a person you're considering making a partner in your business, it's best to initially go on a 'first date'. Tackle a small project or two together to see working methodologies, communication capabilities, and shared core values. These are things that can only be revealed once the two of you work together.
What to Look for?
The late Paul Allen became friends with Bill Gates as a kid, and he later convinced Gates to drop out of university to co-found what is known today as Microsoft. He was able to pinpoint Gates' capabilities, as well as the market for them (Allen coined the company name).
Find the Allen to your Gates. Beyond sharing the general workload, you probably already have an idea of why you'd like to have a business partner. They can fill any of the following roles: guiding mentor, savvy networker, financial guru or even entrepreneurial spirit. Ideally, partners complement one another with a few areas of overlap.
Advantages and Disadvantages of Business Partnerships
Advantages of business partnerships
Capital and shared financial commitment: That's the main reason you're seeking a partner, right? Partnerships provide greater access to loans and combined resources to invest in your business.
Combined expertise and resources: Having different areas of knowledge among partners offers a more well-rounded approach to business.
Shared workload: Infinitely easier than flying solo in the business realm. Hello, vacation to the Peloponnese!
Potential tax benefits: A general partnership allows the business itself not to be taxed but rather for the business partners to pay taxes on an individual level, lowering the amount of taxes each must pay.
Contacts: Wasta is an Arabic word specifically used to describe one's clout or access to people of power or influence. Who you know is everything in the business realm. If your business partner has a lot of
wasta, your business could benefit, as it will be degrees closer to contacts, clients, investors and the like.
Partnership Disadvantages
Joint liability: Yup, in a partnership, you're assuming all liability for any debts and losses within the company (FYI: any mistakes said partner makes can lead to your personal assets being seized).
Sharing a reputation: While your partner will likely increase your networking pool, recognise that anything they say or do will directly reflect on you and your company.
Lack of total control: Regardless of who is wearing the pants in the partnership relationship, you are no longer in 100% control of the company.
Shared profits: Business profits are divided among partners, which may lead to disagreements if contributions are perceived as unequal.
Challenges in decision-making: Collaborative decision-making can slow down processes, especially if partners have differing visions for the business.
Setting Up a Partnership: 2 Steps Only!
Setting up a general partnership is arguably too easy, much like a marriage in Vegas. Oh wait, we already covered that, right? Two steps:
Register the partnership. Hi, tax break (brief bureaucracy required first).
Create a partnership agreement defining rights and responsibilities.
Registering a general partnership doesn't require much sweat. Simply decide on a name and the involved partners, then register at your local tax office. The real work comes later.
Creating a partnership doesn't require a written agreement, but it sure is good to have one before starting. It would be worth your while to hire an experienced lawyer to help you set up a business partnership agreement, entailing the rights and responsibilities of the partnership. This includes voting rights, how business decisions are made, how disputes are resolved, how to handle a buyout, etc.
Ground Rules: No Grey Areas, Please
Prenup: Dissolving a Business Partnership
Life happens. Don't be surprised by it. It's important to set up a partnership agreement that outlines the "next steps" in the event of the death of a partner (knock on wood), declaration of bankruptcy, potential buyout, retirement or business sale. This inclusion is often referred to as a buy-and-sell agreement.
A business partnership is a neutral tool that can have a significant impact on your enterprise. Before following your infatuation with a potential business partner, take a beat to consider all of the possibilities of the partnership. If you decide to venture into one, take the time to ensure your business benefits from the partnership. Best of luck, you crazy love business birds!
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Key Takeaways on Business Partnerships
Entering into a business partnership offers numerous benefits for your business, including shared resources and combined expertise. However, it's crucial to understand the various types of business partnerships. You also need to carefully weigh the advantages and disadvantages of business partnerships before proceeding.
Business Partnerships FAQs
Do the most common types of partnerships include general partnerships?
Yes, general partnerships are among the most common types of business partnerships. In a general partnership, all partners share responsibility for managing the business and are jointly liable for its debts and obligations.
What are the benefits of a business partnership?
Business partnerships offer numerous benefits, including the sharing of responsibilities and the pooling of expertise, resources and capital. Partners can complement each other's skills, leading to more innovative solutions and better decision-making.
How do I dissolve a business partnership?
Dissolving a business partnership involves following the procedures outlined in the partnership agreement. Typically, you must formally notify all partners, settle any outstanding debts and obligations, and distribute assets as agreed.
