Advantages and Disadvantages of Partnership: Pros and Cons to Know
Forming a business from the ground up is no small feat, regardless if you’re doing it alone, as a sole proprietorship, or with one or several other people, referred to as a partnership. No matter how many people are involved, there has to be an understanding of the ins and outs not only how a business is supposed to run, but also how the industry in which the business exists works. There are benefits and drawbacks of both types of businesses, and deciding on one as opposed to the other depends on many factors, including the type of business, the size of the operation, the money needed to get it off the ground, and many other factors.
Our focus today is on the pros and cons of the partnership. As you can probably imagine, the more people that become involved in this type of business, the more complicated it can be to run. But for every complication or potential issue that may pop up in this setting, there’s a positive aspect that (hopefully) balances out the negative ones. If you’re considering starting up your own small operation, the following article should give you a good idea of the ups and downs to expect if you decide the partnership is the right path to follow. For the budding entrepreneurs out there, you may be interested in this course on how to start a business for the beginning, then this article on business development strategies for growing your business later on.
What is a Partnership?
Before we get started discussing the good and the bad aspects of a partnership, let’s briefly explain what it is. We mentioned earlier that this type of business involved two or more people, wherein each person contributes money, labor, skills, or anything else of value to the business, and as a result, each person shares in either the profits or loss of the business. Because the details of this type of business can get confusing, a legal partnership agreement may be drawn up in the beginning. Though not required by law, the agreement is highly recommended for prospective business partners, and it lays out how the decisions concerning the business will be made: how to divvy up profits, how to resolve disputes, how to bring in or buy out partners, and how to dissolve the partnership, among other things. To learn more about a certain kind of partnership, this course on partnerships at startups may be helpful if this is the path you want to take.
There are three types of partnerships:
- General Partnership: Profits, liabilities, and management responsibilities are all equally divided up among the partners, or in another way which is spelled out in the agreement.
- Limited Partnership: More involved than the general partnership, this version is better-suited for short-term projects, and states that each partner’s liability and input are dictated by the percentage of their investments.
- Joint Venture: The joint venture is basically a short-term general partnership, usually lasting for one project.
The Pros of Partnerships…
Now that you have a better idea of how a partnership works, let’s now discuss some of the benefits of starting up one of these types of businesses.
- More Capital: As you probably already know, it takes money, a lot of money, to start up a business. Once of the downfalls of the sole proprietorship, in which one person is responsible for a business, the partnership benefits from the presence of several wallets. The more money that is poured into a company in the beginning, the better its chances are in growing and expanding in the future. More capital in the beginning of the business is sort of a gift that keeps on giving in that, if the well-funded company is profitable down the line, that translates to more money for the owners in the future.
- Flexibility and Ease: There is all kinds of flexibility inherent in a partnership. First off, they’re usually much easier to get off the ground, and once started, they’re generally easier than other types of businesses to operate and manage. In regards to daily operations, decisions are relatively easily made, especially compared to a publicly owned corporation, assuming the partners can come to an agreement. Laws and regulations also tend to be the easiest on partnerships.
- Decision Making: Sometimes a source of dissension, but more often than not, the source of inspiration, having several people pitch in ideas as to how the business should run is great way to find a fantastic idea that one person alone may not have thought of.
- Shared Responsibility: Though there may sometimes be hiccups in the decision-making process, the fact that the owners can delegate managerial responsibilities in several ways is a much bigger advantage. They may choose to break things up equally, or they may decide that it’s a better idea to delegate by skills, having people do the things they’re good at. This course on managing up will show those in power how to deal with other managers, as well as those under you.
…And Now the Cons
- Taxes: The partners of a company must each pay taxes on their earnings, and each must submit a tax return each year. If the business is successful, and the partners end up earning above a certain amount for the year, then they are responsible for a higher level of taxation.
- Sharing of Profits: Unless otherwise noted in the agreement, each of the owners in a partnership take home an equal amount of the profits, assuming the company is making money. While this is all well and good if each of the owners are contributing equally to the success of the business, if there are issues with some owners working harder or contributing more to the business than others, conflicts may arise due to the fact that everyone is making the same while some are working less.
- Disagreements: Probably the biggest source of conflict in a partnership, disagreements may arise due to any number of potential issues. These conflicts may range in matters of importance, but even the smallest issue can lead to a rupturing of the partners’ relationships, resulting in damage to the overall integrity of the company, not to mention any personal friendships. If you’re not at your best when dealing with conflict, this course on conflict resolution will teach you how handle yourself properly, and make everyone happy.
- Compromises: Because all partners must agree for a decision to be made, this may lead to an idea being changed so much due to compromise that it no longer resembles the idea it was at its inception.
- Liability: Each partner involved in a partnership is both individually and jointly responsible for the financial burdens of the company, also known as unlimited liability. While this may be an issue for some people, they may wan to consider the prospect of starting a limited liability partnership.
- Limited Lifespan: Though not always the situation, a partnership will normally last until one of the partners withdraws their interest, or passes away.
The partnership seems like a pretty sweet deal, doesn’t it? It’s perfect for those intrepid entrepreneurs out there that want to start a business, but lack either the funds, experience, or know-how to go it alone. If you have that rare combination of business-savvy, but also are able to compromise and get along well with people, maybe the partnership is right for you. If you have the former, but lack the latter, this course on working with difficult people will show you how to deal with tough coworkers.
Top courses in Entrepreneurship Fundamentals
Entrepreneurship Fundamentals students also learn
Empower your team. Lead the industry.
Get a subscription to a library of online courses and digital learning tools for your organization with Udemy for Business.