A partnership is a company owned by two or more individuals. Each partner provides capital and manages the business. In return, the partners each receive a share of the partnership’s profits. According to the United States Small Business Administration, a partnership is one of the simplest business structures to put in place. Taking on a partner can help pool resources and provide another perspective for evaluating important business decisions. However, the business owner will also relinquish a certain amount of control and a portion of profits when bringing in a partner. If you would like to discuss the pros and cons of forming a partnership formation so you can decide if a partnership is right for your business, consider contacting Goings Legal by scheduling a Discovery Call.
Pros of Partnership Formation
Partnerships can offer many benefits for businesses include the following:
- Easy formation
- Added expertise and knowledge
- Additional capital
- Possible tax benefits
- Larger network
- Shared workload
- Another perspective
Easy Formation
Partnerships are easy to form. They do not require extensive filings with the state or the formalities of corporations and limited liability companies. A formal partnership agreement is not required to launch a partnership; however, having one in place can potentially help to avoid problems in the future. Additionally, partners are taxed as individuals, so there are no additional requirements to register with tax authorities. This is called “pass-through” taxation.
Added Expertise and Knowledge
One of the most important benefits of partnerships is that it allows people to pair up with others who may have different but complementary skills, knowledge, or experience. For example, one partner may have a great understanding of the technology involved in the product or service while the other partner has a better financial knowledge base. Therefore, by establishing a partnership, a business owner can access a wider range of expertise to support different aspects of the business.
Additional Capital
Another important benefit of partnerships is that they allow professionals to pool their resources together. Each partner may contribute financially to help launch the business. Having a partner may open new potential lines of investment or a better financial foundation to request a business loan to help finance the business. Launching a business can be an expensive venture. Having someone who can help ease the financial burden can be extremely beneficial.
Possible Tax Benefits
According to the Internal Revenue Service, partnerships “pass through” profits or losses to their partners. Each partner includes his or her individual share of income or loss on an individual tax return. This tax treatment may allow partners to be taxed at a lower rate than they would be if they were taxed at the corporate rate.
Larger Network
Another pro of partnership formation is that it gives partners access to a larger network, which may open them up to more business opportunities. With a partner, the business may be better positioned to take advantage of multiple opportunities that might not have been available to the individual business owner.
Shared Workload
Running a business usually involves a lot of work. By having a business partner, owners can share that workload. The day-to-day operations of the business can be easier to manage, preventing the business from becoming an all-consuming drain of personal resources. Partners can also provide moral support to each other. No one quite understands running your business like your business partner.
Another Perspective
When a person runs a business alone, he or she can feel isolated at times. The owner may not know whether to take a certain path with the business. A partner provides another perspective. Business partners can bounce ideas off each other and brainstorm together. They also have someone to talk to about important decisions for the business.
Cons of Partnership Formation
While partnerships provide many advantages, they also come with certain potential disadvantages, such as:
- Personal liability
- Loss of autonomy
- Uncertainty
- Difficulty scaling
- Tax drawbacks
Personal Liability
While a partnership can provide a path to acquire profits, partners are also responsible for business losses. A partner can be held liable for debts that the other partner accrued, which can place a burden on personal finances. Partners may have unlimited personal liability for the business’s debts. Therefore, the person a business owner selects to go into business with should be someone that he or she trusts not to take unnecessary risks or jeopardize their financial standing.
Loss of Autonomy
While it can be helpful to have another person to evaluate situations and make decisions for the business, taking on a partner also means that an owner will have to relinquish some control. The owner will now share control with a partner. The partners may have to compromise on certain points or defer taking available business opportunities. Additionally, it may take longer for businesses to act because the partners must obtain consensus before moving forward. Business owners may not envision the same future for the business.
Uncertainty
Partnerships may have greater uncertainty than other types of business structures. The business can fail if one of the owners suddenly passes away or leaves. Owners might reach an impasse about how to resolve a conflict or move forward after a disagreement about something essential to the business.
Difficulty Scaling
If the partnership realizes significant success, the business may be difficult to scale as a partnership. To grow, the business may require additional partners, which may mean an extensive vetting process. Additionally, partnerships generally need to be more careful about the risks they take because of the unlimited personal liability.
Tax Drawbacks
Partners must pay taxes on their share of business income when they file their individual tax returns. They are also responsible for paying self-employment taxes. In some situations, however, it may be less expensive to pay business taxes versus individual taxes.
How a Lawyer Can Help
A business lawyer can discuss the pros and cons of partnership formation that are specific to a particular business. The lawyer can discuss various types of structures, including partnerships, and whether a partnership is the right structure for your business. An experienced attorney at Goings Legal can help create partnership agreements that include the following key points:
- The rights and responsibilities of the partners
- The capital investment of each partner
- Operating procedures
- How the partnership’s earnings will be divided between partners
- How to resolve conflicts
- How new partners will be evaluated before joining the partnership
- How to dissolve the business
Contact Goings Legal Today for Help Forming a Partnership
Partnerships represent many potential pros and cons, depending on the business and its unique needs. If you are planning a partnership for your business and would like more information about the pros and cons of partnership formation, schedule a Discovery Call to consult with a knowledgeable business attorney who can help determine whether this structure is right for you.
