Advantages & disadvantages of a business partnership
When done well, a strategic business partnership may allow you to expand your product or service offerings, increase your profits, expand your clientele and more. But it’s also important to understand the risks and liabilities involved before deciding if a partnership makes sense for your organization.
Consider how the following advantages and disadvantages may apply to your business’s current state.
Key takeaways
- There are three main types of business partnerships: general, limited liability and limited partnerships.
- Potential advantages of a business partnership include sharing expertise, resources and insights to help your organization thrive.
- A potential disadvantage of a business partnership is that it can be challenging to dissolve the relationship on good terms if you decide it’s no longer serving your business needs.
What is a business partnership?
A partnership involves two or more individuals joining forces to do business together. They each bring their own expertise and typically contribute money, property or another asset. They also share in the business’s ventures, both the wins and the losses.
Types of business partnerships
Let’s take a closer look at the three main business partnership types:
1. General partnership (GP): In a GP, two or more parties own the business and share all the profits. They also share the legal and financial liabilities for all debts and obligations.
Example: Law firms often have GPs with individual lawyers who buy into the firm, generate revenue, and share in the firm’s profit, ownership and responsibilities.
2. Limited liability partnership (LLP): An LLP works like a GP, but the partners have limited personal liability for any wrongful acts involving others.
Example: Medical practices often use LLPs, especially if they’re growing to offer multiple specialties under one business. Each doctor shares in the organization’s losses and profits but won’t be responsible for things like another doctor’s medical malpractice.
3. Limited partnership: A limited partnership is a mix of general and limited liability partnerships. One party is the general partner with unlimited legal liability and the other acts more as a silent partner, contributing assets and cash.
Example: Property ownership often involves limited partnerships as an investor—or “silent partner”—contributes capital, assumes some liability and shares in profits, but isn’t responsible for day-to-day operations and decision-making.
Business partnership advantages
A business partnership may help your business reach its goals, whether you’re looking to improve performance or increase market share. Take a look at some additional advantages business partnerships offer.
Shared expertise and knowledge
Gaining a business partner usually means gaining access to their expertise, experience and distinctive competencies. A strategic business partnership should help your company by filling in the gaps in your own knowledge or skills.
For instance, maybe you’re excellent at moving products and inventory but struggle with maintaining accurate books or developing financial strategies. Partnering with another highly experienced professional in business accounting and financial management should strengthen your financial recordkeeping and decision-making.
Access to more resources
Operating a business by yourself typically means you’re responsible for all the financing, connections and resources your business needs. Creating a partnership may alleviate some of that stress by offering access to important resources.
If your prospective business partner has strong financial standing, they may also be able to secure additional financing and cash for your business to support initiatives like growth.
Decision-making support
When making decisions for your business, two minds are often better than one. The intention of entering into a partnership is that decisions fall on all partners’ shoulders, not just yours. Having someone to help you flesh out ideas, brainstorm solutions, identify potential problems and see situations from different perspectives can strengthen business decisions and mitigate potential risks.
Additional business opportunities
With the added support of a business partner, you’ll likely see a boost in efficiency and productivity, which can then save you time and money. Sharing tasks and responsibilities with them may also give you the freedom and flexibility to explore other business opportunities, such as:
- Researching the competition or ideas for business innovation
- Marketing your business to more investors
- Implementing creative rebranding
- Expanding your location or product line
Expanded network and audience
Strong business partners often have a network of valuable industry and community contacts. And these contacts may help connect you with potential clients or offer preferred rates for their services. They can also help collaborate on community and publicity events or otherwise support your business.
Additionally, experienced or highly regarded business partners may help you grow your client base by expanding your brand reach through their own business outlets and connections.
Business partnership disadvantages
Despite their benefits, there may be certain drawbacks to business partnerships. While some may be impossible to avoid, a proactive mindset can help you better understand if a partnership is right for your organization. Here are a few of the potential downsides to a business partnership.
Loss of autonomy
While the ability to share important business decisions with a partner has its benefits, it also limits some of the control you have. And it may lead to longer, more complex decision-making processes. When entering a business partnership, you should be prepared to compromise on some aspects of the business and operations. Compromise is often necessary to be a successful team.
Unlimited liability
In a business partnership, business liabilities are usually a shared responsibility, including when it comes to finances. So you may be individually responsible for any business debts your partner can’t pay. For instance, let’s say your business permanently closes due to financial stress. Of the $50,000 in debt that remains, only $20,000 is your partner’s personal responsibility. You may be personally responsible for the remaining $30,000. Creditors may even seize your personal property to recover the debt they are owed.
Taxation
Business partnerships generally don’t pay income tax at the business level. All earnings and losses are “passed through” to the individual partners. Each partner reports their share of the business’s earnings and losses on their annual tax return, paying individual taxes on the business’s earnings accordingly.
Partnership earnings are subject to self-employment tax rates. And partners may end up paying more in taxes than a differently structured business would. Profits must also be claimed and taxed in the year they are earned. Consult a tax professional for input on the benefits and drawbacks of different business structures. You can learn more about tax implications for business partnerships from the IRS.
Potential for conflict
Because money and livelihoods may be at stake, it’s not uncommon for disputes to arise among business partners. When considering a prospective partner, try to ensure they share your work ethic, vision and values before joining forces. It’s best to also look for someone calm, rational and skilled at communication.
Exit strategy complications
If you or your partner decides to sell their share of the business, problems may arise if everyone isn’t on the same page. And disputes could derail the sale of the business shares or lead to soured emotions between all parties.
Working exit strategies into a written business contract with your partner will help ensure a smooth transition if one partner wishes to leave the company. One example is a “right of first refusal” clause that allows you to buy your partner’s share of the business before they sell to someone else. This clause also helps to avoid third-party involvement in your company.
It’s advisable to consult a business attorney for guidance in crafting exit strategies and selling business shares.
Business partnership FAQ
How do you know what type of business partnership is right for you?
Choosing the right type of business partnership to form is an essential step. After selecting the right individual to partner with, you’ll want to consider how much liability each partner should have. For example, a GP can be easy to set up, but each partner won’t have much liability protection.
How do you start a business partnership?
You’ll typically need to register your partnership in your state to get started. And each state has different registration requirements. But once you understand those requirements, the next step is to create a partnership agreement. The agreement should cover details like who holds the decision-making power, how to solve disputes and what to do if one partner decides to leave.
What types of businesses are best for partnerships?
Individuals who work in the medical, legal, financial and investment fields often benefit the most from forming a business partnership. Architects, accountants and consultants also commonly form partnerships. Really any profession where each individual plays an active role in the business is suitable for forming a partnership.
Is a business partnership right for you?
Before entering a business partnership, evaluate the potential benefits and risks it offers your business—and you.
Keep in mind that teaming up with a skilled, well-connected and experienced professional with whom you collaborate well may help launch your business into a new era of success and growth. However, a less-than-ideal partner may do the opposite, leading to conflicts or increased risks for your organization.
Capital One is ready to be your partner with business-grade benefits, best-in-class rewards and flexible spending tools that help you reach your goals. Compare our business credit cards and apply today.
