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The Pros and Cons of Partnership Agreements

Image: Creative Commons

There are several ways to structure a business, but this week I’m going to be doing a three part series specifically on Partnership Agreements.  Today I want to highlight the pros and cons of this business structure, tomorrow I’ll be discussing how to define each partner’s roles and responsibilities, and then Thursday we’ll be wrapping it up with case studies of successful Partnerships.

I have had good and bad experiences with Partnership agreements in my journey as an Entrepreneur, and think it’s important to understand the pros and cons before deciding that a Partnership is the best business formation for your Company.

The Pros:

  • Synergy – without a doubt, there is typically an incredible synergy that comes with a Partnership.  Being able to bounce ideas off of your business partner is invaulable, as is having someone else to be able to solve problems with, create new products and services with, etc.  There is motivation, accountability, and support that comes with a successful Partnership.
  • Complimentary Strengths- if you find the perfect partner, one person may have strengths in certain areas like Sales/Operations while the other person’s strengths lie in Finances/Public Relations.  There is an excellent book called “Strengths Finder” that we highly recommend if you have a business partner, or are looking into creating a Partnership with someone.  Michelle and I have both utilized this tool to understand how our strengths compliment each other and it’s really enlightening to see how each of us possess similar, yet different strengths that we can leverage off of each other.
  • Shared Costs – especially if you’re a start-up, this can be super helpful to share the initial start-up costs with your business partner.
  • Relatively Easy Tax Returns and Formation – A General Partnership is normally a “pass through” tax entity, meaning the partners (not the partnership) are taxed.  Also, you typically do not need to register your Partnership with your state and pay licensing fees as with other business structures (consult with your CPA and/or attorney to be sure you understand your specific state’s laws and regulations).
  • Shared Roles/Responsibilities – instead of wearing all of the hats that a sole-member business partner might have, creating a Partnership allows you to divvy up roles and responsibilities for the Company.  Stay tuned for more on HOW to share your roles and responsibitilies – tomorrow!

The Cons:

  • Shared Profits/Losses – instead of enjoying all of the profit you might see as an individual business owner, you share the profits when you’re in a Partnership so you may not make as much money as you would if you solely own the business.  Similarly, if you incur losses you share these as well – one Partner’s negative performance could tank the business so this is just a risk to consider.
  • Control – you don’t have total control over the business.  There may be disagreements that lead to a falling out, one person decides they want to buy out the other, etc.
  • Liability – if one Partner is unethical, that person’s actions can legally bind the other Partner.  If there is ANY part of your gut that doesn’t trust your partner, you see any slight red flag – there is probably a reason.  Be sure that you can trust your partner without a doubt – their name is essentially your name at the end of the day.
  • Ruined Friendships – many if not most Partnerships are created because the two business partners started out as friends, then had the brilliant business idea.  Be VERY careful about entering a Partnership with a friend, and especially a family member.  Choose your business partner because they are the BEST fit for you and the business, not just because you think it would be fun to start a business with your friend. I like John D. Rockefeller’s words of wisdom: “A friendship founded on business is a good deal better than a business founded on friendship.”

Come back tomorrow to check out how to assign roles and responsibilities within a Partnership!

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