Pros and Cons of a Business PartnershipsBrian Jang ON October 30, 2020
When starting your business in Canada, you will have a variety of choices to make, including whether your business will be a sole proprietorship, a corporation, or a partnership. Choosing the right business structure will depend on your current needs as well as your long-term goals and several other factors.
If you have one or more partners, you may be assuming that a partnership is the best choice for you, but have you weighed all the pros and cons of that decision? As with virtually every other business decision, choosing a partnership will come with certain advantages, but also its share of disadvantages.
Business Partnership Pros
- Less Expensive to Set Up. A partnership is comparatively inexpensive and benefits from the ability of all partners to contribute toward raising funds. With multiple partners, borrowing becomes much easier than it would be for a sole proprietor. Additionally, partners will pay taxes based on their share of the earnings, whereas a sole proprietor would be responsible for the entirety of taxes owing.
- Broader Range of Experience. With each partner bringing their own individual experiences and knowledge to bear, your partnership will benefit from a broad range of competencies. Each partner likely has their own contacts, giving you access to an even wider pool of expertise. Dividing tasks among partners allows each person to make the best use of their individual strengths, benefiting the collective.
- Other Points of View. Sometimes we can be blind to something that is right in front of us or may face a stumbling block when attempting to deal with various problems. This is often simply a factor of our own experiences or lack thereof. By working with one or more partners, more diverse ideas and approaches come into play, allowing difficult situations to be dealt with more effectively and offering learning opportunities to all.
Business Partnership Cons
- Shared Power. Partnerships mean that partners share power and responsibility. While this may not sound like a bad thing at first blush, consider that one of your partners can sign a contract on behalf of the business. If the business is then unable to meet its obligations, all partners share liability. If you have a single partner and they prove untrustworthy by accruing debts and then disappearing on you, you will be responsible for 100% of the debts. Partnerships, therefore, should only be entered into with those whom you can trust completely.
- Personality Conflicts. Even if you have no issues trusting your partners, that doesn’t mean there will be smooth sailing. Conflicts of other sorts can creep up. Even if you and your partners have been friends for years, working together can reveal a whole other side to their personalities. Business partnerships can dissolve just as easily and unexpectedly as any friendship, or even marriages.
To help determine if you are compatible with your business partner, there are some traits you should evaluate, such as their work ethic. Is your partner a reliable and serious worker? Will they work as hard as you, or will you come to resent them leaving you to carry more than your share of the business? Do they possess the determination to see things through? You will certainly want to work with someone who works at a task until they complete it successfully, pushing through difficulties and setbacks. Do they also possess integrity? Can you count on them to always do the right thing even (especially) when it’s difficult? Have you ever known them to cheat or steal? How do they behave when they think no one is watching?
- Shared Profits. Just as you will share responsibility when things go wrong, you will share the benefits when things go well. This is normal and reasonable, but what happens when one partner does a disproportionate amount of work? What value do you assign to the partner with the most experience? Discussions regarding remuneration can often be awkward, especially if one partner perceives themselves to be of greater importance to the business than the others.
For this reason, it is important to figure it out right from the start and in writing exactly how profits are to be split and how debts will be paid. You should be clear from the beginning how much authority each partner has, and the responsibilities they will assume.
Formulating a dissolution strategy is also important in the event that one partner should seek to leave. This should be done at the inception of the business, while all parties are on good terms. Trying to negotiate an exit strategy becomes increasingly difficult as friendships falter and animosity grows.
If a partner does leave, you will need to update your business registration and contact your bank about the change in your business structure to update loan agreements and accounts. You will also contact your lawyer to go over all the legal aspects of the partnership agreement, and have your accountant review your records, accounts, liabilities, and assets.
Business partnerships offer several advantages but be sure to enter into them with eyes open and proper agreements in place. A good understanding of the pros and cons of a business partnership will allow you to avoid some of the pitfalls while enjoying the benefits that partnerships present.
For accounting help with your business partnership, contact BCJ Group today.