Before your business takes flight what should you do? Select the most suitable business structure. To create your mammoth of a success, you will need everything from resources to the right decision makers. A business partnership might just be the right thing.
Two pillars are better than one, they say.
Why would you choose a business partnership?
Some want to have another to share the professional burden with. Others look to a business relationship to make up in strengths, expertise or resources. Still others would prefer to have the freedom to create personalized governance between the business owners without the interference of the government.
Whatever the reason behind it, forming a business partnership definitely has its advantages. But like all things, it also has its disadvantages. If you have the knowledge of both – what it entails and what to expect, it may just be the best arrangement for an excellent business.
There are several types of partnerships when it comes to deciding on a business structure. Two of the more common are General Partnerships and Limited Partnerships.
A general partnership consists of two or people (or companies) who share ownership of a business and are active decision makers. It is up to them to define what each manages, how the profits and losses are shared and all other bureaucracies. Let’s look at some of the main benefits and concerns.
–Multiple Expertise. Everyone brings their own creative business thinking, characteristics, skill set and knowledge to the table for the benefit of the business.
–Economical. It is relatively cheap to establish this business structure. It is also cost effective to maintain as multiple people pull their resources and capital for combined use.
–Flexible. When it comes to this form of arrangement, it is up to those involved to dictate a partnership agreement. This defines, for all present and future purposes, who does what, how each partner is compensated and all other formalities for maximum efficiency as well as legal purposes.
The partnership agreement should include the procedures to follow should various situations arise. The usual must-haves recommended are clear rules for a change in ownership, an exit strategy for a partner who chooses to leave the venture, and the dissolution of the business – for example the requirement of a unanimous decision by all.
–Private. Unlike other set ups, partnerships are not required to have their accounting records and all else published. In other words, there is a lot more freedom to keep business matters between the walls of “the family” without the pressure of external scrutiny.
–Untaxable. The last major attraction for this structure is the fact that the business is not taxable as a separate entity. Instead, the individual partners are taxed through their personal income of reported profits, separately. It is basically a sole proprietorship shared by the number of owners.
All businesses carry risk. The type of risk you are comfortable with will sway the choices you make. General partnerships are no different.
–Financial Liability. Partners are personally liable for business debts. This is a risk not all people are willing to take because it can lead to the loss of both personal income and assets if the business falls through.
–Accountability. Each partner is accountable for the others actions. This can pose as a major risk. You are personally liable for the others miscalculated decisions if they are unable to meet their financial requirements.
–Conflicts. The more people involved in major decision making, the higher the chance of disagreements. To see eye to eye on every decision is virtually impossible and can create conflict or stall directive.
A limited partnership differs from the general as it has both a general partner and a limited partner. The general partner has full control of all decisions, and is the only one to be personally liable for debts. The limited partner, as a passive investor, contributes capital and is only liable for that said capital. This is an attractive position for many investors and is why this structure is said to bring in the most funding.
The downside of this arrangement is the lack of active involvement by the limited partner. Decisions are made by only one mind and with it comes all of the risk.
Limited partnerships work best when the general partner holds all of the expertise and all that’s needed to complete the harvest of ultimate success is additional capital.
The value of a business partnership is tremendously important. When you understand the possible issues that can come with the combined efforts of a partnership, you can use it to your advantage. A way to deepen the trust. For example, in our consistent search for new projects, new clients, new partners, we utilize great communication and the ability to listen to new perspectives. The complimentary outcome of diverse business savvy help spark better decisions, efficiency, nobility, and of course better returns.