Advantages & disadvantages of a business partnership
Read these tips to help you decide if a partnership is right for your business.
February 7, 2023 7 min read
You want your business to succeed, and a business partnership with the right professional may help it do just that. A strategic business partnership should be a mutually beneficial alliance where both professionals share business ideas, knowledge, resources, risks and rewards. When done well, a business partnership may help you offer new products or services, increase your profits, expand your clientele, take over a new area of the market or even minimize client- or shareholder-perceived weaknesses.
It's important to understand that a partnership may not be the best solution for every business, as it could present increased risks and liabilities. Here is a list of some important advantages and disadvantages to consider when deciding whether a partnership is right for your business.
Advantages of a business partnership
The advantages of business partnerships may help your business better reach its goals, such as improving performance or increasing market share. Take a look at some of the benefits of a business partnership below.
1. 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 gaps in your own knowledge or skills. For instance, if you're excellent at moving products and inventory but struggle with maintaining accurate books or developing a successful financial strategy, partnering with another professional who is highly experienced in business accounting and financial management should strengthen your financial record-keeping and decision-making.
2. More resources available
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 your goals. Experienced business partners often also have key industry and community connections that may further aid your business endeavors.
3. Decision-making support
When making decisions for your business, two minds are often better than one. Entering into a partnership should mean 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.
4. Additional business opportunities
Beyond weighing in on decisions, your business partner should also share the workload. Efficiency and productivity are likely to increase due to the added support of your business partner. Being able to divide 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.
5. Expand your network and audience
Strong prospective business partners often have a network of valuable industry and community contacts. These contacts may help connect you with potential clients, offer preferred rates for their commercial services, collaborate with you on community and publicity events or otherwise support your business. Experienced and/or highly regarded business partners may also help you grow your client base by expanding your brand reach and recognition through their own business experiences and audiences.
Disadvantages of a business partnership
Despite their benefits, business partnerships may have certain disadvantages. While some drawbacks are impossible to avoid, understanding them may help you decide if a partnership is right for your business. It may also help you prevent, identify and mitigate the cons of any potential partnership.
1. Loss of autonomy
As noted above, important business decisions should be made in collaboration with your business partner. While this has benefits, it also limits the control you have over your business, 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, as compromise is necessary for you and your partner to be a successful team.
2. Unlimited liability
In a business partnership, there is rarely any established business liability, which means that business liabilities are typically you and your business partner's personal responsibility. The decisions you and your partner make together about your business finances could also impact each of you personally.
Often, business partners are held jointly and severally liable, which means that you may be individually responsible for any business debts your partner is unable to pay. If, for instance, your business permanently closes due to financial stress with $50,000 of remaining debt and your partner's personal assets only total $20,000, you may be personally responsible for the remaining $30,000. Creditors may even seize your personal property to recover the debt they are owed.
Business partnerships generally do not 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. Unlike a limited liability company (LLC), profits cannot be retained in the partnership to be drawn as income later at a lower tax rate.
So how does this differ from being the sole owner? Let's say you open a high-end flower delivery business. In the past year, it earned a profit of $150,000 after you paid your own salary. If the business is structured as an LLC or a sole proprietorship and you are the sole owner, you would report the whole $150,000 on your personal tax return and be taxed accordingly. In a 50/50 partnership, you and your partner would each claim 50% of the business's profit (or $75,000) on your individual tax returns, reducing your individual tax liability.
When considering a business partnership, 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.
4. Potential for conflict
Because money and livelihoods may be at stake, it's not uncommon for disputes to arise among business partners due to factors such as conflicting business values or perceived unequal efforts. When considering a prospective partner, try to ensure they share your work ethic, vision and values before entering a business partnership. It may also be beneficial if they are calm, rational and skilled at communication.
5. Exit strategy complications
If you or your partner decide to sell their share of the business, problems may arise if all partners aren't in agreement. Disputes could derail the sale of the business shares or cause soured emotions between all parties. Exit strategies may be worked into a written business contract with your partner to help enable 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, avoiding third-party involvement in your company. It's wise to consult a business attorney for guidance in crafting exit strategies and selling business shares.
Is a business partnership right for your business?
Teaming up with a skilled, well-connected and experienced professional who you collaborate well with 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 that can add challenges to your life. Before entering a business partnership, evaluate the potential benefits and risks it may present for your business—and yourself.
Interested in other ways to support your business's success? Reach out to learn more about Capital One's business products and services and how they can help.
This content is not intended to provide legal, investment or financial advice or to indicate that a particular Capital One product or service is available or right for you. For specific advice about your unique circumstances, consider talking with a qualified professional.