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Before you start your small business, you will have to decide on a business structure. You have a variety of options, including a sole proprietorship, a partnership, a C corporation, an S corporation and a limited liability corporation.
Many big names in U.S. business were initially founded as partnerships, including technology powerhouse, Hewlett Packard, and financial behemoth, Goldman Sachs. For a small business, there are pros and cons to the partnership business structure.
Pros of Business Partnerships
Divided Responsibility. A successful partnership capitalizes on the diverse strengths of the partners. This division of labor, at its best, can result in a more productive and efficient business than if each individual worked independently.
Psychological, Emotional and Moral Support. Starting a business often is challenging and stressful. Partners can provide support to each other, which can be critical in weathering the struggles and setbacks that any new business faces.
Funding. Together, partners may be able to provide more capital to get a new business off the ground and may have greater access to outside funds through relationships with financial institutions or potential investors.
Low Startup Costs. The costs to start a partnership are limited, although you may need to hire a lawyer to assist in drawing up a partnership agreement.
Flow-Through Income (Losses). The partnership’s income or losses flow through to the individual partners for tax purposes.
Partnership Appeal to Potential Employees. The potential to become a partner could help the partnership attract needed talent.
Cons of Business Partnerships
Personality and Management Style Conflicts. While disagreements are inevitable in any business partnership, to succeed, partners must share common goals and business philosophies and must find mutually acceptable ways to resolve disputes. If they can’t work as a team, the partnership may be doomed.
More Cumbersome Decision Making. The more individuals who must be consulted before making a business decision, the slower and more cumbersome the process will be. On the other hand, this can, at times, result in a more deliberative process and conceivably better decisions. However you view the partnership decision-making process, how and by whom decisions will be made should be spelled out up front to make it as efficient and straightforward as possible.
Personal Liability Exposure. Partners are personally liable for legal actions taken against the partnership and for the partnership’s debt and other liabilities. As a result, a partner’s personal assets could be on the line if the partnership struggles to pay its bills, can’t repay borrowed funds or is hit with a legal settlement. There are ways to limit or protect against some liability exposure, such as purchasing business liability insurance or forming a limited liability partnership. A lawyer experienced in business partnership issues can help identify ways to protect personal assets.
Joint Liability. Each partner may be liable for actions taken by the other partner, such as debts incurred or contracts signed, even if the action is taken without the other partner’s knowledge.
Dependence on Individual Partners. The ongoing success of a partnership generally is dependent on the contribution of all partners. As a result, if a partner dies or cannot work because of illness or accident, the business could be crippled and, in the worst case, may not be able to recover. Purchasing key man insurance is one way to protect the partnership financially from the death of a partner but operationally it could be seriously or even fatally wounded if a partner is sidelined for an extended period of time or permanently.
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