Let’s be real: creating a business is no walk in the park; it requires a whole lot of strategising, dedication, experience and of course, capital. The business structure you choose for your company — a sole proprietorship, a partnership, a limited liability company or a corporation — can help ease the workload. Whichever entity you opt for will influence various aspects of your business, affecting things like your company name, how you file your taxes, and equity distribution.
When two or more people run a business, sharing management duties and earnings, it is considered a partnership. Forming a partnership is a popular option, as it can get companies off the ground quickly. There are three types of partnerships:
- General Partnership — In this configuration, partners are equally responsible for the operation of the business and are accountable for unlimited liability.
- Limited Partnership — This is similar to a general partnership, except that there must be at least one general partner and at least one limited partner. In this type of arrangment, each partner’s liability and input are dictated by the percentage of their investment.
- Joint Venture — This is simply a short-term general partnership, which typically lasts for the duration of one project.
Determining whether or not a partnership is the right move for you depends on several factors, including the type of company, the scale of operation and the available start-up capital. Before you dive into a partnership, though, you need to figure out whether this is the right business structure for you. Do you prefer working solo or do you like including others in the decision-making process? Are you comfortable dividing the equity and profit? The answers to questions like these will help determine if a partnership structure is the right one for your business. If it is, you will need to explore your options.
Go for a partner who will complement your skills and fit well within your industry. A word to the wise: partnerships based on friendship are ill-advised, as that dynamic follows you into the business. Work often suffers and many friendships have been broken beyond repair. Depending on how you set things up, partnerships can be a dream come true or a
nightmare.
Partnership pros
- Easy set-up — It’s easy to establish a business under a partnership arrangement, as the partners all bring capital into to the company, thereby reducing start-up costs.
- Squad magic — Each partner comes with a set of skills, networks and clients. Combining these forces strengthens the business. Your partner/s will be your squad, motivating and supporting you through challenging times and increasing the company’s momentum when it comes to meeting goals.
- Shared risk — The risk factors associated with a start-up will be divided, lessening the fear of bearing the full burden.
- Borrowing power — Because the joint forces inherent in partnerships are more favourable to banks and other financial institutions, businesses with partnership structures tend to enjoy higher borrowing capacity.
- Lighter workload — The partners divide the day-to-day management of the organisation; this reduced workload reduces individual stress levels.
- Flexibility — As a business expands its needs change, it may outgrow the original business structure. It’s easy to adjust the legal structure of partnerships later on.
- Tax benefits — In a partnership, members gain from flow-through income taxation, whereby all income, deductions and credits are transferred to each partner, to report on via their individual tax returns. This bypasses any chance of double taxation, as partnerships are not liable to corporate income tax.
Partnership cons
- Liability — In a general partnership, the company’s debt follows you. If the partnership is not structured as a corporation, members are personally responsible for the company’s losses, acquire the debt if the business lacks the resources to cover it. Partners are legally obligated to dip into their personal accounts or use their assets to pay off the
company’s debt. - Sins of the partners — In the same vein, partners pay the consequences of other members’ poor business decisions or financial mishaps. The actions of one partner will affect all the others. Every partner is “jointly and severally liable” — so if one doesn’t own up to his liability, the others have to pay. The member with the highest assets will pay off the debt, followed by the next, until all liabilities are settled or the parnters become bankrupt, whichever comes first. Similarly, the reputation of one partner can taint the others based on association.
- Slashed cash — As you earn, you’ve got to share. This can get particularly complicated if all the partners are not pulling their weight, but are still reaping the rewards. This can be demotivating for the more dedicated partners.
- Dreaded decisions — If parnters’ business philosophies are not in sync with one other, decision-making can become tedious and even problematic as partners disagree. Differing opinions can spiral into uncontrollable disputes, leading to the dissolution of the partnership. Such friction can upset the status quo, and cause delays in production and growth, all of which indirectly affect profits.
- Tax drawbacks — The individual tax is both an advantage and a disadvantage. The taxes that businesses must pay are generally lower than personal income tax rates. Collectively, therefore, partnerships may end up paying more taxes than a business structure would.
Such setbacks can be avoided, however, by drafting a legal agreement that addresses any potential problems. Details such as capital contribution, partners’ duties, how decisions
will be made and disputes resolved, and liability resolutions should all be outlined. The long-term success of a partnership depends heavily on how individuals’ personalities are navigated, but it could very well be the structure that allows your business to reach its true potential.
