To Partner or Not to Partner: Business Partnership Pros and Cons
Considering bringing on a business partner for your small business? Use our list of pros and cons to determine if a partnership is the right step for you.
Jan 11, 2021
5 min read
Jan 11, 2021
5 min read
COVID-19 has forced many small business owners to make incredibly difficult decisions including cutting back on staff, temporarily closing their doors, moving completely online, or weighing in new options to bring in much-needed funds.
Even without a pandemic, running a business is no easy feat—and for many, the idea of splitting financial costs, liability, and workload with a business partner sounds enticing. If you’ve been considering bringing in a business partner or investor to help alleviate some of the financial or operational burden, keep reading. Below, we go through the most common advantages and disadvantages of having a business partner and other things to consider before making the commitment to share your business.
So whether this is an option to help get your business through this pandemic or you’re thinking about starting a business with a friend, knowing these pros and cons before you commit may help you avoid a headache further along the road.
What Are the Advantages of a Business Partner?
Here are some of the most common reasons why you and your business may benefit from adding a business partner:
An extra set of hands can be incredibly helpful when running a business—especially if you’re having trouble achieving work-life balance. Sharing administrative, operational, and creative responsibilities will allow each partner to devote more time to establishing working processes and solutions for each component of the business.
Ideally, you’d want to choose a partner who has a few different skill sets from yours. This can help ensure a seamless split of responsibilities and avoid any missed opportunities.
Shared Financial Costs and Risks
Starting and running a business costs money. A business partner can help you reduce your costs by half and even allow you to invest more money upfront. Unless you’re in a limited partnership, which also has its advantages, you’ll most likely be splitting costs and responsibilities evenly. Therefore, should your business experience a financial loss or acquire debt, your personal financial burden could be reduced when having a partner.
Simple Taxation and Paperwork
In a partnership, taxes are usually filed and paid through the individual partners. Instead of filing and paying for a separate business entity, you and your partner(s) will be able to include your profits and expenses in your individual tax returns.
Establishing a partnership also doesn’t require any extensive or fancy paperwork. A simple document where you list items such as workload, the financial input of each partner, the split of profits and losses, and how conflicts will be resolved can be enough to establish a strong foundation. Establishing a limited liability company (LLC) takes a little more work on the paperwork front, but it’s worth considering as it can provide beneficial protection for you and your partner.
Lastly, added expertise, knowledge, and skills are one of the most impactful benefits of a partnership. Perhaps you’re a creative mind with little knowledge of bookkeeping or building a website, a business partner with those skills will allow you to focus on your particular skill set.
Having a partner can also be a great motivator and help bring in new ideas that may contribute to the growth of the business and in turn, your profit.
What Are the Disadvantages of a Business Partner?
Now, let’s take a look at some of the potential drawbacks of a business partnership. Although having a partner can be a great asset, it may not be the right course of action for your business at the moment. You may also come to find that depending on the nature of your business, simply hiring a helping hand may be a better option for you.
Whether you’re just getting started or you’re considering bringing on a partner to your already established business, it’s important to keep your profit in mind. If your business is your only source of income, make sure you’re comfortable with the financial split and that your share can still provide you with a living.
Joint and Individual Liability
In general and limited partnerships, the decisions that your partner makes will hold you responsible both legally and financially.
For example, if your partner is involved in a collision while driving a company vehicle and they can’t cover the costs, that financial burden would also fall on you. For this reason, finding a business partner that is reliable and that you trust is imperative. Depending on the nature of your business and risk exposure, it might also be worth considering forming an LLC instead.
Reduced Control and Creativity
Numbers are often easy to split—decisions and creative control, not so much. When committing to a partnership, it’s important to consider how open you are to sharing decisions and control of your business.
If you’re looking to keep creative control and decision-making, you may want to consider a limited partnership. However, if you’ll be splitting costs and responsibilities evenly, you must work with and run all decisions by your partner to help ensure a fruitful working relationship.
Since money, stress, creativity, and hard work are all involved in running a business, potential for conflict is always present. In fact, about 50% of business partnerships fail within the first three years. To keep a partnership running smoothly, you must be prepared for disagreements and compromise. If you tend to be unyielding when it comes to your business, having a partner may not be the best choice.
It’s also highly recommended to establish an exit strategy in your agreement in case you and your partner choose to split ways.
Additional Things to Consider Before You Start a Partnership
Before committing, below are some additional key questions to help you better determine whether having a partner is right for you. Ask yourself and your potential partner these questions to make sure you’re both on the same page.
Are you prepared to make compromises when it comes to your business?
Are you good at delegating responsibilities and trusting others to get things done?
Do you and your potential partner have similar values, motivations, and work ethics?
Would you consider your potential partner a good support system?
Are you comfortable with establishing and respecting boundaries?
Are you willing to be legally and financially responsible for your partner’s decisions?
Do you have a clear view of how responsibilities, costs, and profits will be shared?
If you answered yes to all of the questions above, you might be ready to bring on a partner. If you’re still unsure and prefer to look at other growth options first, download our guide on six profit-boosting online tactics to help grow your business.