When starting a business, you have two key options: to go it alone or to enter a partnership. An extremely popular business structure, a partnership gives you the simplicity and flexibility of operating your business as individuals, rather than as a company. This eliminates reams of frustrating paperwork and reporting obligations. That said, there are benefits and disadvantages to this structure, as this blog outlines.
What exactly is a business partnership?
A business partnership is enacted when two or more parties engage in a business venture. The principal goal of a business partnership is to jointly run the venture with the ambition of making a profit. Partnerships can be formed by individuals or entities (i.e. corporations). A partnership is perhaps the simplest business structure to set up and dissolve.
Business Partner – Pros
- More access to capital – One of the clearest advantages of a business partnership is the splitting of financial responsibility. Launching a business is an incredibly expensive venture. So, when you share that responsibility with someone of equal passion, you are more likely to get the venture off the ground. A greater access to capital has other advantages, too. Firstly, entering a partnership with one or more people (depending on the partnership type) affords you increased cash flow and financial security. And, secondly, funding your venture is far less stressful.
- Equal division of labour – Running a business can be one of the most stressful activities you’ll undertake. Along with selling your product or service, creating and maintaining a website, developing a marketing campaign and more, there are countless day-to-day tasks. With a business partner, you have someone to share the daily administrative tasks with. In addition, your partner can help you make major company decisions. By dividing up these duties, you will notice a dramatic increase in efficiency and productivity. This way, you will be able to accomplish much more than you would as a sole trader. And, most importantly, there’s always someone to help if you run into problems.
- Greater knowledge and expertise – Everyone has a unique set of talents and experience to bring to their business. In a partnership, you have the advantage of accessing a wider pool of knowledge and expertise. It’s extremely beneficial to have a partner who excels in areas in which you are not as skilled. For example, your gifts may lie in developing the business and marketing plans, product ideas and the like. Whilst your partner may have expert knowledge of the product or service you are selling. In addition, if this is your first business experience, you will benefit from a seasoned business owner.
Business Partner – Cons
- Informal agreement – One of the key reasons business partnerships are so attractive is they allow for greater flexibility. However, this has the potential to create problems, as well. In creating a partnership (especially between friends), many people find it easier to just make a verbal agreement. After all, setting up a percentage of ownership, outlining each partner’s responsibilities and outlining individual liability can be difficult. A written agreement defines each of these factors clearly, so each partner knows precisely what their responsibilities are and the consequences of not fulfilling them.
- Lower profit percentage – There is a flip side to having additional funding for your venture. A partnership also means you have to give up a certain percentage of business profits. Under this arrangement, profit is divided based on your share of ownership. As such, you must settle for only receiving a part of the total income your company generates.
- Potential conflict – Working with another person can be quite stressful. Unlike a sole tradership, you have to collaborate on all decisions in relation to the company’s future growth. As such, you will have occasional differences. If your work ethic differs from your partner’s, or cannot agree on a decision, your business can suffer. This is especially common when partnering with family members or close friends. To prevent this from happening to you, it’s important to resolve all conflicts in a fair fashion. Talk the problems over and brainstorm solutions. This way, all voices are heard.
Essential contract provisions
To ensure a business partnership is successful, it is strongly suggested to have a written agreement in pace, no matter the relationship with the person you are entering the agreement with. The agreement must address the following provisions:
Contributions – The contract must detail each partner’s stakes in both the forming and ongoing operation of the business. It states how much capital each partner should contribute, and each person’s responsibilities for future business success (i.e. money, time, effort, equipment, etc.)
Distribution – Outline precisely how each partner will split profits. Specifically, how much each person is paid and who is paid first. Also, how each partner is paid a salary (and how much they receive).
Ownership – The contract should detail various scenarios and how they would impact ownership. This may be in the event of retirement, bankruptcy or death. Also, specific provisions should be included to incentivise a partner from leaving, starting a new business, or stealing your client list.
Decision making – As mentioned previously, you and your partner are sure to disagree occasionally. So, define how the daily management and long-term decisions are made. Pinpoint which decisions need a unanimous vote and which business decisions can be made by individual partners. And where possible, define an independent person who can act as a mediator.
Consequences if one party doesn’t meet their obligations
If your business partner(s) fail to fulfil their agreed-upon duties, there are several legal remedies at your disposal.
Expulsion – Unless your partnership agreement specifically addresses expulsion, the business must be dissolved. However, if the agreement covers expulsion, you may continue the partnership with a new member. Expulsion can only be performed in a serious breach of the agreement.
Liability for breach – Whether or not you expel your business partner, you can sue them for contract breaches. However, if the partner simply leaves, this is not considered a breach. However, this is a breach if your contract stipulates a set partnership duration.
Liquidated damages – Some agreements feature liquidated damages clauses. This is only enforced if deemed reasonable considering actual or anticipated damages.