While some businesses, like a sole proprietorship, are owned and run by a single person, others happen to be partnerships. A partnership is when two or more entities run and manage a business and also share the profits. This may include individuals, corporations, or other legal entities. There are multiple types of partnership structures that exist and each serves a different purpose. For instance, some partners are more hands on, while others may offer capital and fade into the background.
Types of Partnerships
As mentioned there are multiple types of partnerships that can exist as it relates to a business. Every partner may contribute something different to the business with examples including capital, expertise, labor, or niche skill sets.
General Partnerships
A general partnership is one of the most equal types as all parties involved split legal and financial liabilities down the middle. What this means is that both parties are liable for any debt the organization has but also split any profit earned equally. General partnerships tend to be easy to establish since they’re informal business structures. All that’s needed is an agreement between both parties to get started. For this reason, dissolving the business is relatively easy too.
Limited Partnerships
Limited partnerships include both a general and limited partner. The general partner has 100% liability for any company debts and the limited partner is more in the background with limited liability and involvement in the business’ daily operations. The latter can sometimes be a drawback as limited partners don’t have as much control over the business. However, the only risk they have is whatever capital they invested. Limited partners tend to be investors who don’t have expertise about the business but deem it a lucrative venture. If successful, they benefit from a return on their investment.
Pros and Cons of Partnerships
There are multiple benefits and drawbacks of a business partnership. It’s important to weigh out the pros and cons before committing to one and keep in mind that benefits and disadvantages will vary between individuals.
Pros of a partnership:
- Bridging a knowledge gap: Some individuals see investment opportunities in certain businesses but aren’t experts themselves. A partnership can ensure they have a stake in that venture without needing to spend time and resources gaining expertise.
- Raising capital: For people who have strong business ideas but lack capital, a partnership can help materialize their idea.
- Reducing expenses: Business expenses can quickly increase and become overwhelming. Splitting the expenses between one or more partners can help ease the financial load.
- Ability to scale: Sometimes, taking a business to greater heights means expanding knowledge, expertise and capital. Partnerships can help a business achieve this and more as they can attract entities who can help scale the organization.
Cons of a partnership:
- Increased risk: Depending on the chosen partnership structure, having a partner could expose a business to more risk. For instance, in a general partnership since both parties are liable for debt, financial chaos caused by one business partner could negatively impact others.
- Conflict: Business partners don’t always see eye to eye. However, when both parties have an equal stake in the business, it could mean more compromise than anticipated, bottlenecks, or slower decision making. There may also be conflicting values, personality traits, or beliefs about how to run the business that could erode the partnership in the long run.
- Exit strategy conflicts: Not every business lasts forever. Business partners may be at odds about when to end the partnership, which can create conflict. To avoid this, consider including an exit strategy within a business partnership agreement-a formal document that comprises a clear outline of roles, profit sharing, rights, and business continuity in case an entity opts out.
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