When done well, a business partnership can increase profits and share the burden of expenses, capital expenditures, and labor to run the business.
By Brad Nakase, Attorney
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After an entrepreneur has decided on an excellent idea for a business venture, they will need to develop a specific structure for the company. While the majority of business startups function as sole proprietorships, there are a lot of new businesses that choose to operate as general partnerships. Starting a partnership comes with advantages and disadvantages. Successful partnerships will divide work evenly, split profits fairly, and develop robust communication methods. Conversely, some partners suffer from problems from the get-go, which can cause their business to stumble or fail.
In this article, our San Diego business litigation attorney discusses some of the pros and cons of beginning a business partnership so that an entrepreneur can determine whether this is the correct business structure for their idea.
Getting a company up and running takes a lot of time and effort. In the beginning, a business owner will need to make many big decisions that will impact the company’s future. Having a partner to help shoulder the burden of everyday tasks can help a business partner handle the stress and have accountability.
Tax Foundation reports that this advantage is one reason why more than 2 million partnerships are in operation in the United States.
Every business owner has areas in which they perform better than others. Thus, finding a business partner who offers complementary skills is a good idea, making it easier to run the business.
There are several ways that business partners can split up their roles and responsibilities. It may be a good idea to have one person focus on the big picture (CEO) while the other focuses on managing accounting duties (CFO).
Before choosing a small business partner, an entrepreneur should consider what the other person can bring to the table that is currently lacking. If an entrepreneur finds someone who offers unique and needed skills, then their expertise can make the business more successful.
Even if an entrepreneur has a good idea for a business venture, it is easy to develop tunnel vision and overlook important details.
A business partner can help an entrepreneur have a different perspective on decisions. There could be an obvious problem, such as one related to marketing, legal, or tech, which would have been ignored without an extra set of eyes. Also, having another person involved can lend confidence to decision-making.
While having a partner involved in a business venture can reduce the burden of running a company, it can also lead to conflicts.
When an individual enters a partnership, realizing that both partners will not always agree on everything is essential. There could be disagreements about the business name, logo, location, or the services and products sold. Both partners must be willing to compromise.
If an entrepreneur is determined to make all the decisions themselves, then a partnership is probably not the best option.
Often, a partnership will begin smoothly but become toxic when issues regarding profits and ownership arise. There are several ways to divide profits, including the following:
An entrepreneur’s method to divide these areas will depend on the specific business. However, this is a topic that one should be sure to discuss with their partner before opening the business.
One of the most significant benefits of being a sole proprietor is that an individual can act quickly. Sole proprietors do not need the approval of any partners and can make decisions without asking for input. Indeed, having a partner can offer the benefit of having an additional perspective, but waiting for approval can affect one’s ability to make quick decisions.
There are several advantages and disadvantages involved in starting a partnership. An entrepreneur should consider their long-term goals and objectives to know if it is the proper structure for one’s business.
Before choosing a business model, an entrepreneur should explore all the available options. Rushing into a partnership with someone he or she is unsure of may force an entrepreneur to sever ties awkwardly in the future. If two partners split, then this can lead to problems for the business, including the following:
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