As your career as a business owner progresses, you may find yourself taking on larger projects and managing a more extensive workload. As your business grows, it’s often helpful to team up with other independents as a way to manage more projects and continue to provide clients with a high level of quality.
An official business partnership—when two or more individuals operate a business sharing management responsibilities and profits—is another option to consider. There are three types: general, limited, and limited liability.
General partnership: Each owner assumes responsibility for management and full liability—they can be held responsible for incurred business debts or obligations.
Limited partnership: A general partner takes on managing power as well as liability, while a limited partner does not participate in daily management and has limited liability—they are only held responsible for incurred business debts or obligations equivalent to the capital they have contributed to the partnership.
Limited liability partnership: All partners have equal management responsibilities and limited liability.
While there are many specific pros and cons to each type, here are the main factors to take into consideration.
The Pros of Partnership
All partnerships have the benefit of flow-through income taxation for all partners. This means that there is no taxation on the business itself, rather, all income, deductions, and credits are passed on to individual partners to report on their individual tax returns. This avoids the issue of double taxation as the business is not subject to corporate income tax.
Partnership is also attractive because it allows you to share financial commitments and work responsibilities. Partnering with another independent professional often opens the door to a more extensive client list and may give you the option of providing a wider range of service options to clients by combining your individual skillsets.
The Cons of Partnership
One big downside to partnerships is legal liability. With most types, at least one party is liable for business debts or losses, as well as the debts or actions of the other partner. Because decisions and management responsibilities are typically shared, partnerships can quickly get complicated if disagreements arise. Another possible point of contention in a partnership is shared profits. While a partnership may help to boost business and bring in more work, revenue is ultimately divided in one way or another.
At the end of the day, if your business partner isn’t someone you fully trust, can make joint decisions with, or can see yourself doing business with on a long-term basis, you may find yourself in a frustrating arrangement.
How to be Savvy about Teaming
Fortunately, many of the advantages of a partnership can be achieved through teaming. In fact, companies are beginning to experiment with hiring groups of pre-formed teams rather than individuals. If you have a big project coming up and are worried you don’t have enough time or expertise to handle it properly, you may want to consider bringing on part-time help.
If you want the benefits of teaming up with another independent but don’t want to commit to the long-term legal obligations of a formal partnership, another solution is to create an unofficial partnership. Independents who want to work together can form two separate entities, which allows you to maintain separate income and liability, stay in business for yourself, and not have to worry about a business relationship going south.
MBO Partners can assist these types of teaming relationships via our industry-leading teaming program that allows independent consultants to build and manage teams, receive broker payments, and pay team members. Creating a partnership between two separate entities also allows each partner to bring on additional workers individually, if desired. This workaround provides the flexibility to partner on the ventures you want without the complex and more permanent decision of entering into a traditional partnership.
To learn more or how to establish an effective teaming relationship, contact us today.
This content from MBO Partners does not constitute legal or financial advice.