Business partnerships have their advantages and disadvantages.
You may not think so, but it’s important to be aware of them before entering into a joint venture with a business partner. This is especially important if you plan to take on debt together, but profit-sharing partnerships also have drawbacks that should be considered.
Are Business Partnerships Good or Bad
Multiple Partners Contribute Valuable Assets
A partnership can be an appropriate business structure when each business partner brings valuable skills and assets to the table and wants to play an active role in running the business.
Everything is multiplied by two:
- You have twice as many resources to invest in the business. You need less outside capital because two people are putting money into the business and two people are giving their time and energy for free.
- This is one of the biggest benefits of forming a partnership for most entrepreneurs. You may find it easier to raise funds if you can show banks or investors that your business has more than one owner with different skills and experience. It can also give outsiders the impression that your small business is larger than it really is.
- If you have twice as much money available, you can start or grow your business faster and easier than if you were working alone with limited funds.
- You can bounce ideas off each other, which leads to better decision making. Even if only one person is in charge, having another person involved in important decisions will lead to better results than if you were making those decisions alone.
- If there are two of you in the business structure, you can also divide responsibilities so that not one person has too much to do – accounting, marketing, researching new products or services, etc. – but both. This gives both partners more time to devote to growing the business and increasing sales.
Competition and Market Authority
The business world is highly competitive, and it’s important for your brand to stand out from the crowd. The more people you have working together, the louder their voice will be, especially when it comes to conversations with suppliers and customers.
Whether you are looking for new premises or negotiating prices, the more people you have working together, the louder their voice, especially when it comes to conversations with suppliers and customers.
When two or more companies and people work together, they will always achieve better results than they would on their own. It gives them the opportunity to share knowledge, resources and experience with each other, which will benefit them in the long run.
More Connections and Credibility
Often, business partnerships develop out of a personal relationship. If you have a friend who is on the same page as you, you might decide to start a business relationship together. It can be fun to work with a prospective partner you know and trust, especially if you’re a first-time small business owner and you need a specific skill like networking or sales to build your business structure.
When you partner with others, they have their own contacts, which means you have access to more people and information. If one or both partners have previous experience in an industry or community, they bring valuable connections that you would not have found on your own..
Partnerships increase credibility with customers and suppliers. While this may not seem as important in the early stages of your business model, it becomes more important as your business grows. When customers and suppliers see that
Increased Capabilities Greater Resources
Collaborating with other businesses can help you enter new markets or reach a larger audience.
Business partnerships not only give you the opportunity to share resources and ideas but also to learn from each other’s experiences. This helps you develop your business and improve performance by identifying areas that need to change.
When you share your business idea with someone, they can help you spread the risk. For example, they can use their savings or other financing options to fund your venture. They could also bring new skills or knowledge to the business that you do not have yourself;
When you start a business, you may decide to go it alone. While this may be the easiest option, there are also benefits to partnering with someone else:
Having someone to bounce ideas off of or collaborating on day-to-day activities can help you get more done;
running a business is often stressful, especially in the early days. If you have someone with you, you can share responsibility for tasks and decisions;
Different perspectives: Two people working together can bring different perspectives and ideas that would not come up if you were working alone.
One of the biggest benefits of a business partnership is that the work does not rest on just one person’s shoulders. You can share it among your partners, which makes it easier for everyone involved in the partnership.
Partners can work on separate tasks and contribute their individual expertise in different areas, ensuring that all areas are covered.
Although it’s important that partners’ skills and strengths are balanced, it’s also important that you trust your prospective partners to do the job well. For this reason, you should always choose partners who have experience and expertise in their respective fields.
The Disadvantages of a Business Partnership
Starting a business with a partnership agreement is a great way to get your business off the ground.
A partner can bring skills (and often more capital) that you do not have, and together you can share the workload and stress.
But there are also potential downsides to forming a business partnership. If you are thinking about starting a business with someone, it’s wise to weigh both sides before signing on the dotted line.
Why Business Partnerships Fail
Partnerships are a great way to share the workload, but when it comes to running a successful business, it can be more effective to have a single owner calling the shots. After all, a shared vision and aligned goals are critical to success.
When two or more people run a business, there is always a risk that they will disagree on important issues.
For example, if one partner wants to expand into new markets while another believes that this could have a detrimental effect on existing product lines, this friction can have a negative impact on business development.
Therefore, it is important that both partners share the same vision and have similar values and goals.
It does not matter how much experience someone has gained over the years if their personal goals are not aligned with those of their partner(s). But even people who have common goals can come to disagreements as soon as they go into business together.
That’s because everyone has a different personality and a different opinion about how things should be approached. For example, one partner might be very interested in expanding into new markets, while another might be more reluctant to make such moves.
Loss of Control
It does not make sense for every entrepreneur to run a sole proprietorship. Some entrepreneurs need to team up with others to get their business off the ground, while others are simply better off working with a partner.
Business partnerships can add diversity of experience and knowledge, help you grow your business faster, and provide much-needed support during difficult times.
You do not have to give up control of your business just because you have a partner. If you are the majority partner in your strategic partnership, you can make most of the decisions. And if you have each partner’s rights and responsibilities spelled out in a partnership agreement, there’s less chance of friction if one partner wants to do something the other does not agree with.
However, if problems do arise, it’s important that both partners know their rights and how to proceed. That’s why it’s important to have a well-drafted partnership agreement from the beginning.
Financial and Legal Liability
You are responsible for everything that happens to the business.
Depending on the legal structure of the business entity, you could be sued or lose all your assets, even if your partner has primary responsibility. This is why many business owners who go into a partnership agreement tend to opt for a limited liability partnership.
However, I’m not a legal expert, and it also depends on the country you’re in. If you want to set up a partnership structure, it’s best to get legal advice from a professional on partnership agreements. If you don’t know anyone, your financial advisor may be able to refer you to a professional who specializes in business relationships and personal liability protection (e.g., limited partnership, general partnership, limited liability company, etc.).
It’s Not Always Fair
A partnership is a great way to grow your business, but it’s its downsides. The most common form is a 50/50 partnership on the written agreement, but that’s not always the best way to run a business.
In many of these partnerships, one person does most of the work and one person only gets the title.
- Who does most of the work?
- Who gets paid?
If one individual partner does most of the work, it could feel unfair if they only get 50% of the profits.
Assuming your business partnership is equal, you need to determine from the beginning how much work everyone will do.
You don’t want to put yourself in a situation where one good partner does all the work and the other reaps all the benefits.
How to Avoid a Bad Business Partnership With a Potential Partner
Even with successful business partnership experience, you can never be 100% sure. Sometimes you’re in it for a few months and then you realize that things aren’t going as planned…
But there are a few things you can do to prevent a bad partnership:
- First, make sure your partner is trustworthy before even considering a joint venture. This is especially important if they are responsible for your company’s finances. You’d be surprised how many people steal from their own partners for their personal profit, and this is one of the worst cases.
- Second, make sure that the two of you’re a good match professionally. If you’re bad at design but good at writing code, don’t try to partner with another developer just because they’re really good at design. That can work, but in most cases it doesn’t and only ends up hurting both parties because one person isn’t competent at something and can’t get it done on time or correctly.
- Then have an attorney draw up a written agreement that covers everything you can think of. This will probably be long and detailed, but it’s worth it because it gives you peace of mind. Most importantly, written partnership agreements spell out exactly the partnership structure, the operating agreement, and how to end the partnership if things don’t work out. This is one of the most common points of contention between partners, and if you don’t want to spend a lot of money on lawyers later, you need to settle this up front.
- Finally, make sure everyone’s goals are aligned. If your partner wants to grow quickly while you’re content to stay a small business, that’s going to be a problem. It’s not enough for everyone involved to agree on the same goals; they also need to agree on what those goals are specifically.
Put Everything in Writing
While face-to-face conversations can be helpful in preventing disaster, it’s absolutely necessary to put everything in writing.
Written agreements will outline how you’ll work together, how things will be handled if one partner wants out or needs financial help, what happens if someone dies, etc.
There are just too many ways things can go wrong, and that’s why it’s important to have a plan of action before something happens. If you’re uncomfortable signing legal contracts – especially ones drawn up by lawyers – don’t enter into any deals until you’re comfortable with the idea of having everything in writing. It’ll save you a lot of headaches later.
If things are going badly and it’s clear that none of your efforts will solve the problem, don’t wait too long to seek professional legal advice. There are many horror stories of founders who held on to their partnerships even though they were going downhill because they tried to take everything into their own hands.
Sole Proprietorship vs Business Partnership
The sole proprietorship is the simplest form of enterprise under which to operate a business. It is simply one small business owner who owns the business.
The main advantages of the sole proprietorship are:
- Cheap to start. Only a few hundred dollars is needed to register a business and start trading;
- Simple accounting. As a sole proprietor, you only need to file your personal tax return, which is relatively easy;
- Easy transferability. You can sell or give away your business at any time (although your creditors may not approve);
- Full control. You make all the decisions in your company;
- Unlimited liability protection. Your personal assets are protected from company debts as long as you do not use them for business purposes;
- Room for growth. When you hire employees or contractors, they can help grow the business faster than one person could alone.
The main disadvantage of the sole proprietorship is that there is no limited partner or general partner to help with any of the challenges the business may bring.
Another disadvantage of a sole proprietorship is that it can be difficult to raise money for an expanding business, as investors are usually more interested in putting their money into a business entity that has a strategic partnership.
What You Should Consider Before Entering Into a Partnership
If you want to do business with a potential partner, there are some important things you should consider first.
A good business partner can help you run your business better than you could on your own. But the wrong partner can thwart your plans and get you into financial and legal trouble.
Starting a business with a partner requires mutual trust, respect, and commitment. You must be willing to share ownership of the business and put aside your differences for the good of the company.
Before signing a partnership agreement, follow these steps to find out if it makes sense for your situation:
- Write down the reasons you are seeking a business partner. Think about how a partnership would help grow your business and what role each person would play in that business.
- Determine if you have complementary skills that would allow each person to do what they do best and work together as a team.
- Discuss how much time each of you is willing to devote to the success of the partnership, and find out if there are any external commitments.