Are you looking for ways to create business partnerships with more than one person to help your company grow or start?
To make the best business decision, learn about the various types of partnerships and their advantages and disadvantages.
Guide to Business Partnerships
Definition of partnership business
What is a partnership?
A business partnership is similar in concept to a personal partner or marriage, where individuals choose to:
- To start a successful business, combine your financial resources
- Share your talents, time, and skills to achieve the common goal of business success
- Participate in the successes and tragedies of their business.
A business partnership is a type of legally binding business entity. It is created by a partnership agreement. The agreement must be signed by at least two people who are co-owners.
Multi-owner partnership structures are where all owners invest their time, talent, or money in the company. Some partnerships allow individual co-owners to be involved in daily operations. Other partnerships offer limited participation but also limit liability for lawsuits and debts.
Partnerships differ from other business structures like corporations because they are not separate entities. The partners pay the income tax on the partnership share. The profits and losses of the company, as determined by the percentage of ownership, are split among the partners and listed in their individual tax returns.
This is the same as a DBA (sole proprietorship) or subchapter-S corporation. It’s a pass-through business. The owners’ personal income tax statements will pass all profits and losses.
Types of partnerships and partners
There are differences between the partners in partnerships and the legal entities that make up partnerships. Before you create your partnership, learn more about the important differences.
Types of partners
Different types of business partnerships may have different levels and hierarchies of participation. This allows partnerships to have multiple types of partners in one partnership. These are the roles that you can give to your partners:
- General Partners are involved in the operation and management of the partnerships and will also be personally liable for any debts.
- Limited partners may invest financially in the business partnership concerns but not in the day-to-day management and running of the company.
- Equity Partners own a portion of the overall partnership and its business assets.
- Salaried Partners are employees who are also partners. They may or not own shares.
- Senior and junior partners have different levels of partnership roles. Each type of partnership has its own duties, management input levels, and financial investment commitments.
Types of partnerships
First, you must decide what type of partnership you want for your business.
- A general partnership comprises owners and partners who participate in the daily management and operation of the company within the partnership. They also have liability for any lawsuits or debts the business might incur.
- Limited partnership consists of one general partner, the business manager, and one or more limited partners who don’t participate in the day-to-day running of the business. They also have no personal liability for company debts.
- A limited liability partnership resembles the limited partnership mentioned above. It often has multiple general partners, not just one responsible for daily business operations.
Read my detailed article to learn about the pros and cons of starting your own business with a partner.
Partnerships: Advantages and disadvantages
Partnerships have many advantages
- Flexibility Most types of partnerships are simple to create, manage, and run. They are much more flexible and less controlled than other businesses, such as corporations. Because the partners create rules and laws about how the business will be managed within the partnership, they don’t have to comply with specific business structure laws. Management is more flexible and requires only the agreement of the partner.
- Finances Most startup partnerships are funded through each partner’s investment in the business. The startup funding is higher if there are more partners. This allows for greater funding for growth and working capital. With a larger marketing budget, you can generate greater profits.
- Credit: Combining all partners’ assets and credit scores can result in a higher borrowing capacity. This is a significant advantage to business partnerships.
- Tax Savings Many partners form business partnerships to reap the tax-saving benefits of income splitting and pass-through losses, which can offset high tax brackets.
- Responsibility Multiple partners are involved in the daily operations of the company. This allows everyone to contribute their best to the success of the company. Smart partnerships share management responsibilities according to each partner’s abilities and skills. You should be proficient in accounting and report writing, while your partner should handle sales and marketing.
- Decisions You and your partners will be able to share the decision-making process. This will allow you to make better business decisions under difficult circumstances. Expertise means more access to business ideas and problem-solving expertise.
- Privacy You and your business partner are free to keep your affairs private as you don’t have to file the annual financial statements required by corporations.
Partnerships are not for everyone
- Liability risk Partners who are not part an LLC or are limited partners are at risk of being sued for all the debts and judgments against the businesses in the partnership.
- Debt Responsibility Most partnership agreements stipulate that each partner is jointly responsible for all partnership debts. Each partner is responsible and liable for their share of the business debts and all other debts.
- Conflicts – The risk of animosity and friction among partners regarding financial matters and business management is a serious disadvantage to partnerships. It is best to create a partnership agreement that outlines all the details of each partner’s roles, responsibilities, financial investments, and other risks.
- Partner Actions The partnership is considered a whole in law’s eyes. Each partner is responsible for any actions of the other partners that could be illegal or fraudulent.
- Arrival and Departure of Partners: If one or more partners choose to leave or join the partnership, the partnership assets (the business or businesses) need to be revalued, and each partner share redistributed. This can be expensive and time-consuming.
How to Divide Profits in a Small Business Partnership
How to share profits and revenue between business partners is a key consideration. This can be done by understanding the calculation of partnership profits and equitable splits.
The type of partner determines the percentage of the profit.
- General Partners – The law does not specify how profits will be divided. However, it states that all profits will be split equally between the general partners. General partners are involved in the management and operation of the business.
- Limited partners They invest in financial matters but they are not involved in daily operations. When you create your partnership, their profit splits will be written in the partnership agreement.
- Equity partners These partners own equity in the company and its assets. Their profit split is usually lower than that of limited partners who don’t own any business assets or brands.
- Salaried partners These individuals can be both employees and partners. They could or might not own shares in the business assets.
- Senior and Junior partners have different roles and responsibilities. They also have a different financial investment and profit-splitting power.
How to form a partnership in business
Most business partnerships are registered in the state where their business is located. State requirements for registration laws can vary. As part of the formation process, partnership agreements are required. These agreements clarify the relationships between co-owners, investors, and partners. These agreements are legally binding and written. They are not required in every business situation.
Our courts will decide if a partnership is the rightful owner of the business by determining whether there was a sharing of profits and losses and capital investments made by partners. They will also determine if the management and control of the business was shared by the partners.
It depends on the state. There may be multiple options for the type of partnership that you can choose to support your business entity structure.
How do I join a partnership?
Many partnerships allow people to join either at the beginning of the partnership or once it is established and in operation. The admission fee for the new partner is a financial or talent investment. The other partners will determine the amount and other details of the partnership, including liabilities, share, and they will also be governed by the written partnership agreement.
Your partnership agreement is crucial
As a partner, your partnership agreement is one of the most important assets. It will outline all the responsibilities and details how partners are divided for profits, losses, or liabilities. It will also detail the expected contributions of each person’s time, talent, and money.
A good partnership agreement will also include actions for common situations like member divorces, death and business closings.
How a partner pays income tax
As a business entity, the partnership does not have to pay income tax like other forms of corporations. Instead, the partners will pay taxes based on the percentage of profit or loss that the business has made in the tax year.
Partnerships must file an information return using IRS form number 1065. Limited liability LLCs with multiple members will file income tax as a partnership. Every state has its own tax filing requirements. Check with your Secretary to find out the laws in your state.
How to find a good business partner
Although starting a company is an excellent exercise in entrepreneurship, it can be difficult to get a partner. A business partner will give you additional skills, experience, and ideas. Two heads are better than one, especially when it comes to brainstorming business ideas or solutions for commerce problems.
Your business partner can help sort out the good ideas and the bad ones, and offer their expert opinion. A business partner can also offer a different perspective on issues that could lead to better solutions.
Your business could benefit from the different expertise you bring to it. This will help increase sales and grow your company. A business partner can bring additional connections to your company that will help you increase profits and improve your long-term projections.
If you have financial difficulties, starting a business can be challenging. Chances are that you and your partner will both contribute capital to the venture. You will likely be approved for a loan faster if you are a partner than if you were an entrepreneur.
Venture capitalists and investors prefer to invest in businesses that have co-founders. Because of their experience, they know that novice entrepreneur are less likely to fail if they have a more experienced partner with the same skill set. It is difficult to launch a business. Partnering with an investor is a great way to stay motivated and build a company.
There are many places you can look if you’re looking for a business partner. Begin by looking within your family, friends, neighbors. Next, expand your search to:
- Events for Industry Networking – Meetup.com, trade shows, Meetup.com inventors groups, Chamber of Commerce, and trade associations
- Online networking sites – Linkedin and Facebook groups, Reddit. Founder Dating, CollabFinder.
- Startup Weekend – Business Incubator & Accelerator Programs
- Government Entrepreneur Assitance Programs
- Venture Capital Investors – FundingPost
Couples as Business Partners – Pros and Cons
It can be a challenge to start a business with your spouse or partner or even a great opportunity. It can be difficult to keep a startup going with your spouse or lover, but it can also lead to great results.
Spouses as Business Partners
- Trust – Your spouse is more trustworthy than anyone else
- Awareness – You both know your strengths and weaknesses.
- Shared Goals: You share the goal of family and financial success.
Spouse as Business Partner
- Dependence upon One Finance Source– If you work in the same company, you risk your family’s income.
- Control It can be difficult to balance dominance between one partner at home and another at work.
How to know when to end a business partnership
Most business partnerships start well. Two or more people share the same vision and goals. They also agree on how to divide the profits. Partners work together to build the business and take pride in what they accomplish together.
No matter how successful it starts, the honeymoon phase of any business partnership will always end. Some partnerships can’t withstand the inevitable disagreements and rough patches that come with any long-term relationship. It might be time for the partners to dissolve a business partnership if they are unable to resolve their differences.
You don’t want to leave the partnership lightly, especially with so much at stake, such as the initial funding for the small business. You don’t want to stay in a bad relationship for too long.
These five signs could indicate that your business partnership is over:
- Change your Values and Goals
- No respect for your ideas
- Your business partner is dishonest
- Partner acts irresponsibly
- Your business partner stops caring
Brian Wilson is the content manager and founder of LLC Radar.
Brian grew up in North Texas, just outside of Dallas, and has a bachelor’s degree in business journalism from Southern Methodist University. Since graduating from SMU, Brian has gained over 10 years of experience in business writing for several online publications.
Brian resides in Plano, Texas and he can be reached by email: firstname.lastname@example.org