It's good to know what the advantages and disadvantages are of partnerships before signing on the dotted line.

3 reasons for and against forming a partnership

May 12, 2017 12:21 pm Published by Leave your thoughts

Although they represent a fraction of small businesses – roughly 8 percent, according to the Tax Foundation – partnerships are a substantial contributor to America's economy. Nearly 11 percent of the private sector workforce derives from partnerships, paying an average $505 billion per year to workers.

An increasing number of them are forming, too: 3.2 million in 2011, up from 1.3 million in 1980, based on the Tax Foundation's latest available calculations. Combined with S-corporations and sole proprietorships, they represent the majority of businesses.

As with any company framework, however, there are positives and negatives to business partnerships that are important to know about. The following will reference what some of these are so you can decide if this formation is the one for you:

Simple and affordable
As noted by the Small Business Administration, one of the most enticing elements of forming as a partnership is its low cost and development structure, particularly compared to other designations like incorporating. Depending on how many individuals will be involved, entrepreneurs can pool together their resources, providing the capital necessary to get things going. The paperwork and licensing process is pretty straightforward also.

Incentivizes hard work
Among the prime perks of co-owning a partnership is the ability to have some of the wealth the company generates. This privilege is often extended to key employees, who may be inclined to devote more of their energies to ensuring the business' success with partner status as the payoff. This motivator may encourage prospective hires to consider applying as well.

Partners complement one another
Everyone brings with them certain talents that they excel in. Formed as a team, partners can apply their skills in a complementary fashion so the company functions as a well-oiled machine.

The ties formed through partnerships can be extremely rewarding. The ties formed through partnerships and the pooling of resources can be extremely rewarding – in more ways than one. 

At the same time, partnerships do have some downsides that can prove problematic.

Potential for disagreement
It would be one thing if business partners agreed on everything. This would certainly be the ideal, but with opinions being subject to change, there's the potential that partners won't see things eye to eye. This can result in hurt feelings or power plays, determining which decision will take precedent.

Sharing the profits
Working in tandem with one several individuals is great because entrepreneurs can share the load, but this sharing comes with determining how earnings will be distributed. The ideal split is 50-50, but this isn't always possible, especially if one partner has more invested than the other(s).

High liability
A prime selling point for forming as an LLC is built in its name – liability is limited. For partnerships, though, liability is unlimited. Indeed, partners are responsible for all costs, debts, errors and decisions, not only of their own making, but also those of their partner. In other words, if a partner doesn't fulfill his or her end of the bargain, the others are on the hook.

These are some of the basics regarding the pluses and minuses of partnerships, but there's much more to it, as there are different types of partnerships. Here at the Law Offices of Donald W. Hudspeth, we have decades of experience in helping entrepreneurs decide what business framework is the right fit, then walking them every step of the way to its realization. Contact us today for these and a wide variety of additional services in legal business matters.

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