Pros and Cons of Business Partnerships

Find a business partner can be the most difficult decision for your company. Inc.com states, “70% of business partnerships fail”. Although this statistic is daunting, many businesses that began as partnerships often become the most successful in the world. To understand the pros and cons of having a business partner, we need to get the general definition and legalities ironed out first. Understanding this is important because each type of legal business partnership has built-in pros and cons. Every partnership is different because every person and every business is unique in their way. So, let’s start out by understanding what a business partnership is.

What is the Definition of a Business Partnership?

The definition of a business partnership is not just a one-size-fits-all description since there are many different legal definitions of a business partnership. These options come with various pros and cons. But, If you are looking for the most general definition of a business partnership that is legally recognized as well, then the “General Partnership (GP)” defined below will best fit what you are looking for.

Definitions and Terms of Legal, Business Partnerships

General Partnership (GP)

A General Partnership is the loosest classification of partnerships. If you and another person are doing business together, then by default it is considered a general partnership. Although you can have legal agreements in place specifically outlining responsibilities, It is not necessary to register with the government or even have a legal contract written to have a General Partnership. With a GP, you have equal shares of the profits and losses and assume responsibility for the debts of your partner and business.

LLC Partnership (also known as a multi-member LLC)

An LLC Partnership can have multiple members, hence why it is sometimes also called a multi-member LLC or LLC Partnerships. Under the LLC Partnership, each member’s personal assets are protected by a legal shield, meaning that generally speaking one member cannot be sued against company actions or debts. However, you can be held liable for another member’s actions, especially if you willingly knew the member was negligent.

Limited Liability Partnership (LLP)

The Limited Liability Partnership shares most of the personal protective qualities of an LLC Partnership so your personal assets are not at risk, but it comes with the exception of being liable for other member’s actions. You are not liable for company debts or another member’s actions. Although, you are still liable if you personally were negligent or did something illegal.

Limited Partnership (LP)

A Limited Partnership can have both a general and a limited partner. The limited partner essentially serves as an investor and receives legal protection from malpractice regardless of their ownership. A limited partner has the capital to invest but does not want to have the responsibility of operating the business. The general partner is responsible for the decisions of running the company and therefore assumes the risks as well.

What are the Pros and Cons of Having a Business Partner?

As we’ve already discussed, business partners vary in roles, responsibilities, and risks; so in saying that, some of the pros and cons may not fit for the type of business model you are creating.

Pros of Having a Business Partner

Differing Perspectives and Ideas: This is one of the most unique and best qualities to have when having a partnership. Tunnel vision and bias can destroy a good product or a good idea.

Balancing Strengths and weaknesses: We’ve heard that opposites attract, well the same is true in business. Many partnerships flourish because the partners complement the others’ strengths and weaknesses

Reduced Risk: Having a partner that fully carries the financial burden of startup or shares in the financial hardship is definitely a perk. Most businesses would never be possible if just one person was solely responsible for the financial obligations.

Larger opportunities and networks: If I have 500 contacts and my partner has 500 contacts, then we’ve doubled our potential. Other businesses are more attracted to doing business with partnerships due to the lack of risk as opposed to doing business with a sole entrepreneur.

Sharing the burden of entrepreneurship: Starting a business is not easy. Starting one on your own is harder. There are many hats to wear when launching a business. It’s been said that business owners should work “on” their business not “in” their business.

Spread the burden of taxes: Uncle Sam wants a part in your business too. So if you have someone to help recoup the costs of asking the government if you can have a business.

Faster Startup: Two are better than one. Sometimes walking and chewing gum at the same time can slow things down. With double the resources and double the hands, for some reason, it seems to triple the output. I’m not sure how the math works on that, but it just seems to work that way.

Support & Motivation: The emotional, physical, and mental strain a business has on a business owner is unique. Some of the bad days, you ask yourself why are you doing this? Why can’t you just get a normal job like everyone else; and then your partner steps in and gives you that boost and motivation to go on and pursue.

Cons of Having a Business Partner

The perception of inequality: We’ve all been there when we feel that we are pulling more of our share than the other one has been. This is tough and often leads to worse things down the road.

Decision stalemates: THe world is moving at a fast pace, and sometimes no decision is the worst decision. Sometimes you have to leave the undecided things alone to let the other good things about the business flourish.

A lower percentage of the profit: It gets tough when you’ve put all your eggs in one basket and you finally get that contract that you’ve worked so hard for only 1/2 of it to make it back to you. If you only could have done this on your own, then you could have 100% of the profits.

Partner liability: Trust could be the most important character trait to have in a partner. If you have a partner that has made bad personal or business decisions then, unfortunately, it’s you that has to pay for it.

Differing visions and interests: As stated already, differing ideas can be a pro but it also can be a con if there’s disagreement. If the idea is large enough and one side decides the impact is too great to ignore, then this is probably the most likely reason why partnerships split.

Giving up ownership/power: Some find it hard to give up control, especially when we disagree with decisions that have been made. Letting the partner be free to make decisions and then also support them can be tough.

More complex decision-making: No one likes red tape…maybe there are some weird ones out there, but in a business partnership, every major decision you have to make needs to involve your partner. Sometimes, the time this is consuming is taking away from other precious time you could be moving on to something else.

Limited Access to Capital: Things happen in our personal or business lives when we wish we had direct access to the Capital our company has produced. Getting your hands on this in an emergency is not as easy with a partnership.

Selling Complications: There are many variables to consider when trying to sell the business. Who, when, where, how much: these questions may be the biggest decision you’ve ever made as a business owner, and the worst part, you both have to be on the same page and agree.

Bad breakups: Finally, the breakup. Entrepreneur.com says, “The average startup breakup rate can be 20-30% higher than marriage divorce rates.” So, something went sour. Somewhere somehow something went wrong. Things get personal and heated and this is one of the worst things to have to endure as a business partner.

Ask Yourself These Questions to Help You Decide

No one can answer whether a partnership is right for you, but you can ask yourself some questions to ask yourself that may help you decide if you are unsure.

Can I Find a Partner That Compliments my Weaknesses?

Treat the partnership by recruiting like an interview. Ask them questions about their strengths and weaknesses. Go through the interview process with them and have them prepared to ask you questions as well. If you know the individual, then it’s even more crucial that you quantify some metrics due to two personal bias involved.

Has their personality and character been tested, tried, and confirmed by others? Maybe another way of asking this is if you would trust them to handle your personal affairs? The chances are that starting a business can be very difficult to not get personal affairs involved, but also the fact that starting a business is personal. Aside from that, you don’t want legal trouble later on, so please confirm their character.

Are their personal affairs in line?

This is a strictly level-headed question. How is their marriage? How are their children? Are they in debt? Have they set down roots in that area? To some, these questions seem too personal. I understand, but if you are putting your family’s finances on the line, you need to analyze external influences and weigh the risks. It wouldn’t hurt to get a credit report and background check. Rocky marriages, shaky families, personal debt, and future uncertainty have taken many partnerships down.

Do You Need a Business Partner?

Here is a very basic test you can do to see if you do. Write down a list of what your business will need for operation: Sales, service, capital investment, bookkeeping, marketing, design, production, assembly, paperwork, recruiting, development, etc. Now go through the list and prioritize the items by importance. Next, check off the items that you have experience with and feel you can be responsible for. Finally, tally the score of what you are going to do and compare the score of what you won’t be able to do. Most of us think too highly of ourselves and overpredict what we are capable of, so you have to be honest with yourself. How did you score? If you find that the score of what you can’t do is too great and you don’t have the ability to outsource, then you may need a partner.

In Closing

If you want more information, the Small Business Administration is a good place to help you on your journey. Some of the most successful businesses in the world started with partnerships. If the intangible things line up in a partnership it almost seems that partnerships have a greater chance at success then a sole proprietorship. Starting and growing a business can be one of the most challenging and yet rewarding things you could ever do in your life. For all it is worth, enjoy the ride.

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