Did you know that 8% of businesses are partnerships? That’s about 2.2 million firms across the United States, all of whom recognize the same thing—business partnerships are a great way for many startups to get their feet on the ground and launch their big idea.
But first, you have to understand what you’re getting into.
Here’s a look at what business partnerships are, how they work, and how you know if they’re the right choice for you.
What is a Business Partnership?
A business partnership is a way of legally structuring a business so that two or more parties share in the management and profits. Despite the name, a partnership does not necessarily need to be between two people. It’s not a casual agreement with your good friend, either.
Rather than being a casual relationship, a business partnership is a legal agreement baked into the foundation of your business. Typically, two or more partners craft a written agreement, invest their money in the business, and share in the profits or losses based on their investment. For example, if you have three partners investing a total of $300,000 and each invested $100,000 equally, then it would make sense to divide ownership among the partners evenly.
In other words, for most businesses, the partnership model begins even with the startup plan. The business then grows from the partnership.
How Does a Business Partnership Work?
A partnership is a highly diverse business model. It could be a partnership between two or more people, it could be a partnership between two or more entities, or it could even be a partnership between two or more people and entities.
To be clear, a partnership is not a separate entity from the business owners. That would qualify the business as a corporation, which is a completely different legal entity. Think of a partnership like a sole proprietorship, where the business and the individual are one and the same, except unlike a sole proprietorship, there are multiple parties involved.
Types of Partnerships
The governing structure of a partnership is pretty simple. There are three types of business partnership:
- A general partnership
- A limited partnership
- A limited liability partnership
A general partnership is the simplest of the three. It consists of two or more partners who jointly manage the business’s daily activities and jointly share in its profits or losses. This also means that all partners share equal liability for lawsuits and debts.
A limited partnership offers a layer of removal. In this arrangement, one or more general partners manage the business and retain liability, while one or more limited partners do not participate in operations or retain liability. This type of partnership makes it easy for friends and family to pool resources while keeping responsibility for operations in the hands of a more capable general partner. Plus, limited partners usually can’t lose more money than they invest, since they’re not liable for debts.
In a limited liability partnership, the liability protection afforded to limited partners is extended to all partners, including the general partner. That way, no individual partner is liable for the actions of another.
Benefits of Business Partnerships
Why go into business with partners? There are several reasons why it might be worth your while.
For many business owners, one of the biggest pros of business partnerships is access to a wider range of expertise. Let’s say you want to open a bakery. You have all of the baking skills, but you don’t have the first clue about accounting or taxes. In that case, a partner could introduce the expertise you lack so that you can focus on what you do well.
Another common benefit of business partnerships is the increased cash flow, which in turn translates to more business opportunities. Let’s say you want to start a property management business, but you don’t have the funds to invest in a property on your own. A partnership is a common tactic for friends, family, or interested business collaborators to pool resources, allowing access to greater opportunities than any individual partner would have on their own.
Of course, it’s more than just hard cash. The right business partner may also boost your eligibility for certain financing, which may be the advantage you need to get your business up and running.
Disadvantages of Business Partnerships
Like any business structure, partnerships come with their share of disadvantages as well.
The biggest disadvantage is the murky question of liability. While sharing the business with a partner introduces new assets and opportunities, it also means sharing responsibility for debts—even if the other partner incurs them through their own recklessness.
In addition, because you share in responsibilities and liabilities with your partner, a business partnership also means a certain loss of autonomy. In a sole proprietorship, you have sole control of your business and can make decisions as you please. In a partnership, you have to clear business decisions with your partner or partners, and decisions must be made through agreement among all partners.
Looking for Business Partners? Get Affordable Small Business Legal Counsel
For the right business, business partnerships can be the key to getting your big idea off the ground. But first, you have to make sure your partnership is set up the right way—and that’s where we can help.
Here at Uptrend Legal Counsel, we offer affordable small business legal counseling to enterprising business owners like you. We make it easy to understand the legal ins and outs so that you can make the right decision for your business.
If you need to speak with an attorney about your options, get in touch today to learn more about how we can help.