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Starting a Business with a Partner: Pros, Cons, and How-Tos

Starting any business can be a huge undertaking. However, starting a business with a partner can be even trickier because you have two people that are likely both very passionate about the company and may have differing opinions about certain aspects of it.

There are approximately 21 million businesses in the U.S. that have only one employee, while about 5 million have between one and nine employees. This stark contrast occurs for good reason: running a business as a partnership can be a challenge.

Creating a partnership from a legal perspective is the simple part; it is making the commitment and working together to create a framework that can be difficult. Creating a partnership agreement, even if you do not have a more formal business structure, is a critical aspect of any partnership that you should not overlook.

The Benefits of Having a Partner in Your Venture

Perhaps the greatest benefit of having a partner in your business venture is having someone who can share the workload of starting your own business with you. It can be extremely difficult to do everything on your own, and having someone to share your burdens can be very beneficial.

Having a partner also means that you can both pool your resources, skills, and experience together. One of the major reasons that businesses fail is because the business owners do not have experience running a business and are unsure of what to do. Having a partner, particularly one that has business experience if you do not, can significantly decrease this type of risk.

You have likely heard the saying that “two heads are better than one.” The same rationale applies to business ventures. Having the right partner can help you be more creative and plan more effectively. When two people work on the same project, they are bound to have differing opinions and viewpoints, which can be helpful for growth and allow the company to thrive.

The Drawbacks of Including a Partner

Interestingly, many of the drawbacks of having a partner spring from aspects that could also be considered benefits. Differences of opinion can lead to irreconcilable clashes that may threaten the partnership. Personalities, goals, and passions can all play a huge role in the business relationship, and they may be the reason that a partnership ultimately fails.

Many people compare partnerships to marriages—you need to be sure that you are compatible before you make a commitment. You will be spending a lot of time with your partner as part of this venture, so be sure that you have chosen the right person.

In some instances, you may not be able to make decisions regarding the business without consulting the other partner. This process can make decision-making time consuming and inefficient. You can combat this potential drawback by allowing one partner to make all of the day-to-day matters or only requiring consultation on bigger decisions.

Finding the Right Partner

The “right” partner for you is going to depend a lot on your personal preferences, skills, and characteristics. There is never a one-size-fits-all solution to what type of individual will work best as a business partner. However, you can still look for specific qualities and traits that may be more desirable than others.

  • Work ethic and drive – In most partnerships, unless a partner’s role is more of a passive investor, you want someone that is going to work as hard as you do. You do not want someone who will split the profits with you, but only works part-time or rarely shows up. Consider whether your potential partner has the right drive and work ethic to match yours, or you will likely face conflict very quickly.
  • Motivation – Why does this person want to join your business venture? Is it because he or she is passionate about the product or service that you are offering? Or, is it simply to make money? If your potential partner does not have the right motivation, there can be conflict, particularly if values clash.
  • Complementary skills or experience – While it may be easier to have someone on your team who has similar experiences or skills as you, it is often more beneficial to the relationship to have someone who has expertise in areas where you may be lacking. For example, if you are the creative person who physically makes the product you are selling, it might be helpful to have a partner who knows sales, marketing, or even accounting. These skills are essential to a business. When partners complement each other they can also be more efficient, as each partner spends time doing enjoyable things or engaging in activities in which they excel. When you are constantly forced to do things you hate, you are likely to lose motivation quickly or simply avoid those tasks altogether. Allowing each partner to focus on his or her strengths can propel the business forward in a way that may not be possible otherwise.
  • Communication and trust – Being able to talk to your business partner about a variety of issues is essential for a successful partnership. If your potential partner is unwilling to discuss finances, planning, or the future, that is a huge red flag. You should be able to communicate with each other about goals, ideas, values, motivations, and more. Communication also goes hand-in-hand with having the ability to trust your partner. You cannot build a successful partnership if one partner is unreliable or cannot be trusted with money, confidential information, or other aspects of your business.

Developing a Business Plan

If you are starting a business with a partner, it is especially important to sit down and create a business plan. While a business plan is a good idea with any venture, it is particularly vital when you are going into business with someone else.

  • It can provide a roadmap for you and your partner – It can help you establish what exactly you want the business to do and allow you to set specific goals.
  • It is a good way to communicate with your partner about the vision for the business – You can see if your values and ideals align through this process. It can provide valuable insight, not only for the future of the business, but also into what motivates and drives your partner.
  • You can find out in which areas your partner excels – For example, if your partner does not think you need to budget for advertising, you can dive into why that may be. Does your partner have marketing skills or experience to do this him or herself? Alternatively, did this area of expense just not occur to him or her because your partner lacks marketing experience altogether?
  • It can help you realize areas in which you may need outside help – Perhaps you need to engage a marketing professional or get additional training in sales because neither partner has the skills necessary to complete those types of tasks. Creating your business plan together can help you realize these potential issues before they cause problems for your business.

The Importance of Having a Partnership Agreement

There are no legal formalities that you absolutely must meet to create a partnership. Instead, a partnership is essentially formed when you say it is—or when you start acting as a joint venture. However, you should still create a partnership agreement to help you and your partner define the rights, roles, and responsibilities that each individual holds. The partnership agreement should generally address the following information:

  • The name of the company and identifying and contact information for individual partners
  • How profits and losses will be split
  • Which decisions need approval from both partners
  • Information regarding the organization’s place of business
  • The effective date of the partnership agreement
  • Information about the initial capital contribution
  • Ownership percentages (will it be a 50/50 split or some other division?)
  • Whether one partner will play a management role or if both (or all) partners will fulfill these obligations on a day-to-day basis
  • Benefits information (such as paid time off, health insurance, retirement plans, etc.)
  • Accounting methods (cash or accrual accounting)

You may also want to include additional information that relates to the agreement itself, such as which state’s law will apply to the agreement, how disputes will be resolved, and whether each portion will be considered severable if any other portion is determined to be invalid under the law.

Partnership agreements can solve many disputes before they become real problems. They can also force the partners to talk about difficult subjects ahead of time. Sometimes, discussing these issues can make you realize that this type of venture is not the right option for you or that the prospective partner may not be the right choice for your business.

Licenses and Permits

Even though you do not need to file any formal documents with your state to create a general partnership, you must still comply with the licensure and permit requirements for a business of your type. You should use the company’s name and contact information (instead of an individual partner’s information) to obtain these permits and licenses. Necessary filings for these items can vary widely by state, county, city, and industry. Take some time to examine local laws for your industry to determine situations where you may need a permit or license to ensure you are complying with legal requirements.

Partnership Taxes

General partnerships are “pass-through” entities. That means that the income generated from the venture will end up on your personal tax return. However, unlike a sole proprietorship, you must also report your income and expenses to the IRS using a separate tax form: Form 1065. Then, each partner will receive a Form K-1 that he or she will use to report the income from the partnership on their individual tax return.

Partnerships do not have separate tax rates like a corporation would, but they are required to take this additional step in tax filing to report their income. Individual partners will often be liable for self-employment taxes as well. As a result, partners will usually have to pay estimated quarterly taxes.

Partnerships and Other Business Entities

When most people think of a partnership, they think of a general partnership, which has at least two owners and is essentially an extension of those individuals. However, you can actually have a partnership within other business structures as well.

For example, general partnerships do not offer any asset protection. As a result, partners may want to consider forming a limited partnership, LLC, or corporation. Forming an LLC converts the “partners” to “members,” but otherwise the individuals’ roles are the same. In a corporation, the owners become “shareholders,” which can complicate their ownership, but it can be structured very similarly to a partnership regarding management and sharing in profits and losses.

Forming an LLC, or any of these other entities, is a much more formal process than creating a general partnership, but the ideas are essentially the same. The formation documents set out the roles and responsibilities of the owners and indicate how profits and losses will be allocated. In creating any of these other entities, however, there may be compliance requirements that you must meet under state law that would not apply when creating a simple general partnership, including holding annual shareholders’ meetings and meeting internal record-keeping requirements.

Get Business Formation Help

Creating business documents from scratch can be extremely intimidating. LegalNature can help you to create tailored documents that work for your situation and comply with applicable legal requirements. Create your business formation documents today.