It’s no secret that starting your own business requires a lot of time, effort and capital. However, there is an ancient technique that humans have used for thousands of years to accomplish more with less effort on their part—cooperation. In business terms, this means forming business partnerships with one or more people.
Business partnerships have produced a lot of great companies, from Larry Page and Sergey Brin forming Google to Ben Cohen and Jerry Greenfield starting, believe it or not, Ben and Jerry’s. Business partnerships have a lot of advantages to offer entrepreneurs. However, as Steve Wozniak can attest, they also have some disadvantages.
Advantages to Business Partnerships
More Financing
The most obvious advantage to a business partnership is that you have multiple people contributing money to get the business going. This not only lessens your financial burden, it can also reduce the pressure you might be under to make your business succeed.
More Brainpower
As the saying goes, two heads are better than one. Your partners will have knowledge and experience that you don’t, from ideas about the product you’re selling to thoughts about how to run the business more effectively.
More People to do the Work
Owning a business entails wearing a lot of hats and taking care of many different tasks, from resource management to opening a business account. Business partners can help with all the tasks that need to be done, and you’ll be able to accomplish a lot more than if you were working alone.
Less Paperwork
When you form a business partnership, you don’t pay additional business entity taxes, which means you don’t have to prepare and file a business tax form. However, you should know that this doesn’t mean you’ll be paying less taxes. Instead, you’ll have to include your share of the business’s profits and losses in your individual tax return, and you’ll have to pay any additional taxes as a result.
Disadvantages to Business Partnerships
You Have Less Independence
When you’re in a business partnership, you can’t make any significant decisions without at least consulting your partners. This can be frustrating, especially if you’re used to making decisions on your own. In addition, if one of your partners makes a decision without consulting you, that partner isn’t held solely responsible—all the partners have to accept responsibility for the decision and the fallout.
You’ll Disagree With Your Partner
Disagreements are bound to happen when you work with other people. When that happens, you’ll need to figure out how to resolve your differences, preferably in a way that leaves both sides feeling like they won.
It’s worth mentioning that you’ll also need to think about a partnership exit strategy in the event that you and your partners disagree so severely you decide to go your separate ways. The strategy should include how to redistribute profits and losses, as well as the responsibilities that each partner will have. Ideally, you should come up with this strategy around the same time that you're preparing your business plan.
You Can’t Keep all the Profits
While having more people means having more resources, more knowledge and more people to do the work, it also means that any profit has to be split more ways. Depending on how many partners you have, you might end up with less money from your venture than you’d hoped.
Business Partnerships pay Higher Taxes
Being taxed individually for your business can be an advantage, but it also has its drawbacks. The biggest drawback is that since businesses have lower tax rates than individual taxes, you and your partners might be getting taxed more. While you and your partners might be paying less taxes individually, collectively you might be paying more than you would if you were paying business taxes.
You’re Tied to Your Business
Perhaps the biggest disadvantage of a partnership is that all partners are responsible legally and financially for the business. This means if your business runs into legal issues, you and your partners won’t be considered separately from the business. Also, if your business goes into debt, collection agencies can come for your personal funds.
Business partnerships have a lot of advantages. However, they also have disadvantages. You’ll need to consider both and discuss the best way to structure your business with your potential partners.
No matter what kind of business structure you choose, First Alliance Credit Union can give you the tools you need for success. A business account will help make keeping track of business funds easier, and business credit cards and business lines of credit can give you the funding you need to make your business goals a reality.
