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A business partnership may bring multiple benefits, such as sharing the expenses and responsibilities of operating a business. But a business partnership also may carry risks, especially if the relationship sours or the business goes up for sale.
Before taking the leap, parties may want to consider the potential advantages and disadvantages of a partnership.
Key Takeaways
- A partner may share your costs, workload, and risk — as well as the control and the profits.
- Advantages might include additional skills, capital, responsibilities, ideas, and a larger network.
- A partnership also may come with shared liability, less autonomy, and the potential for conflict, especially if the partnership comes to an end.
- An explicit written agreement and mapped out exit strategy may help clarify expectations between partners.
What Is a Business Partnership?
A business partnership is a structure in which two or more people share ownership and profits of a business, with liability depending on the type of partnership. The specifics vary by type of partnership, and each type of partnership has different rules.
Advantages of a Partnership
Partnering with someone who has a broad range of expertise may help bring different strengths and cover any gaps a single owner may not be able to fill alone. A partner also may come with their own resources for growth.
1. Complementary Skills and Expertise
A good business partner may bring extra knowledge and experience or complementary skills to help grow the business. For example, one partner may be skilled at generating new ideas but may struggle to network or find the right marketing strategy. Or one partner could be a technology whiz but not be proficient at managing the books. The right business partner could help fill these gaps with their own skills and acumen.
2. More Capital and Financial Resources
Some prospective partners may bring an infusion of cash, while others could bring other assets, or a network of lenders and creditors. More avenues to raise capital could help make it easier to identify new opportunities and weather slow periods.
3. Shared Costs and Workload
A business partner may help divide the financial and day-to-day burden of management, which may help the business grow while lightening the daily load. Knowing there’s a trusted person who is able to hold down the fort also could help free partners to take some time off when needed, leading to a better work-life balance that could help boost productivity and morale.
4. More Business Opportunities
By sharing the labor and responsibilities, each partner may be more available to pursue new opportunities while upholding shared responsibilities. These new initiatives might include:
- Expanding the range of offerings
- Attracting new investors
- Planning a major rebranding
- Franchising or moving into new markets
A partnership might help limit some of the opportunity costs of a new venture if one partner is willing to handle the day to day while the other is directing their efforts elsewhere.
5. A Wider Network
A business partner may bring their own contacts, and each one could be an opportunity to connect with new clients, suppliers, creditors, and community events that the business might not have reached otherwise. Sometimes, a personal connection could help make a real difference towards opening doors to the next business venture.
6. Support and a Fresh Perspective
Operating a business may sometimes be stressful, so it might be helpful to have a partner to act as a sounding board, debrief on important issues, provide damage control when things don’t go well, or to celebrate wins with. A fresh set of eyes might help catch things that a sole owner could miss, from which markets to pursue to when it's time to update prices. These additional perspectives could help make the difference between a well-thought-out plan and a rushed decision, especially as a business settles into habits and risks developing blind spots.
Disadvantages of a Partnership
Just as a partner might help share the load and the costs, they also might share the profit and add risks of their own. Some potential risks to consider include:
1. Shared Liability
In addition to sharing profits and assets, you may share liability for partnership debts. This could place a burden on your personal finances.
2. Loss of Autonomy
Before signing on a partner, ask yourself if you’re willing to relinquish some control. Owners used to running a solo operation may find it challenging to compromise after years of independence.
3. Potential for Conflict
Conflicts may arise between partners, as differences of opinion or unequal effort could strain relationships over time. Choosing partners that share your vision and have similar values and work ethic may help lower this risk, but even the best partners might have occasional problems that could require careful management to keep them from affecting day-to-day operations.
4. Exit Strategy Complications
As circumstances change, one partner may wish to sell the business while another disagrees. Exit strategy clauses in the partnership agreement may help plan for this possibility. Other clauses may help address scenarios like bankruptcy or a partner moving out of the country.
5. Lack of Stability
Even a solid exit strategy might not plan for every eventuality and a change in one partner’s circumstances might still affect the business. For example, if a partner develops a disability or their personal financial situation changes, it might impact their ability to support the business. Even short-term pressures could possibly lead to long-term instability, so before bringing on a partner, consider your tolerance for risk and possible contingencies to help mitigate it.
How to Help Set Up a Partnership for Success
Some of these disadvantages might be managed with due diligence and a detailed, written partnership agreement. Consider these steps to help a partnership start on a positive note:
- Choose the right partner: Carefully evaluate a prospective business partner to help determine if they share your values, vision, style, and work ethic. Good chemistry may go a long way, too.
- Put a written agreement in place: A partnership agreement could help clarify expectations around profit splits and responsibilities.
- Build in an exit strategy: Proactively addressing how partners might leave — by choice or circumstance — could help prevent or mitigate disputes down the line.
The Takeaway
Weighing the advantages and disadvantages of a partnership could come down to your own goals, finances, mindset, and business model. A partner may help lead to growth and split responsibilities, but the right fit also matters. Consider taking the time to evaluate a prospective partner carefully before committing. If you’re still mapping out your foundation, these steps to starting a business could help you plan your next move.
Frequently Asked Questions
What are the advantages of a business partnership?
Advantages of a business partnership may include broader skills and expertise, more capital and financial resources, shared costs and workload, the chance to explore more business opportunities, a wider network, and added support and perspective.
What are the main disadvantages of a partnership?
The main disadvantages of a partnership may include shared liabilities, a loss of autonomy, potential for conflict, complications when exiting the business, and a general lack of stability if a partner’s circumstances change.
Who is liable for debt in a business partnership?
In a general partnership, each partner may share responsibility for business debts, depending on the partnership's structure and circumstances.
What are the risks of a business partnership?
The main risks of a business partnership could be shared financial responsibilities, loss of full control, potential conflicts between partners, and potential instability.
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