There are currently about 2.2 million business partnerships in the US, which forms about 8% of all small businesses. While not the most common type of business entity, (S Corps make up about 73% of small businesses), partnerships are a popular choice among entrepreneurs. Before structuring a small business partnerships, you’ll need to consider the pros and cons of this type of entity.
Pros of Forming a Partnership
- Partnerships are easy to form. In fact, they’re one of the only type of business agreements that can be formed with a handshake.
- Partnerships are inexpensive to form. There is not a lot of paperwork and state filing to do with a partnership so they are relatively inexpensive. Business partners can draft the agreement themselves, or they can hire an attorney which normally costs anywhere from $500 to $2,000.
- Partnerships offer favorable taxation to most smaller businesses.
- Business partners have more say in the activities and management of their business.
- Partnerships often do not have to pay minimum taxes that are required of LLCs and corporations.
- Well-formed partnerships are often profitable and organized. If one partner decides to leave the business, they can do so without much consequence, if it was written into the agreement.
- Each business partner brings a fresh perspective to the business and is able to share responsibilities, rather than running the business by themselves.
Cons of Forming a Partnership
- Owners in a small business partnership are subject to unlimited personal liability for the debts, losses and liabilities of the business (except in cases of limited partnerships and limited liability partnerships).
- Individual partners must take the responsibility of the other partner’s actions–even if they are unfavorable.
- Poorly organized partnerships often lead to legal disputes and lawsuits. Partnerships can quickly become expensive when it comes to solving disagreements.
- Because partnerships are jointly owned, each partner must share the successes and profits of their business with the other partners. An unequal contribution of time, effort, or resources can cause discord among business partners.
Discuss the pros and cons of forming a partnership with your partner before settling on an agreement. Talk through even the awkward “what if” situations to get a feel for whether the partnership is a good fit. It’s best to consult a professional before entering into a partnership if you think there is a possibility you might regret the agreement somewhere down the road.
FAQs on Small Business Partnerships:
How easy is it to form a partnership? Forming a partnership is relatively easy and can even be established with a handshake, making it one of the simplest business agreements.
2. What are the key advantages of partnerships? Partnerships offer favorable taxation, shared responsibilities, and more say in business activities, fostering profitability and flexibility.
3. What are the risks associated with partnerships? Partnerships entail unlimited personal liability for debts, potential conflicts, and the obligation to share profits, possibly leading to discord among partners.
4. Can partners exit a business without consequences? Well-drafted agreements allow partners to leave without severe consequences, but poorly structured partnerships can lead to disputes and legal issues.
5. How crucial is professional advice before forming a partnership? Consulting professionals is highly recommended to navigate potential regrets and ensure clarity on the terms and possible scenarios within the partnership agreement.