It can be expensive to start a new business. Partnering with another person can be a great way to cover those early costs and build up some liquidity. Read on to learn whether partnership could be a good choice for you as you start your business and how you can get started.
What are the benefits of partnership to start a business?
Partners can offer three forms of capital you need to succeed in your new business:
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Intellectual capitalGreat partners often have know-how, experiences, and skills that their counterparts don’t have. As a team, they have a solid understanding of what needs to happen in every part of their business. They also excel at executing their plans. |
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Financial capitalGreat partners have access to cash or ways to acquire funding. They have a good credit score (at least 650), which is often a must for taking out term loans, asset-backed loans, or SBA loans to cover startup costs, buy inventory, or fund the business’s operations. |
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Human capitalGreat partners are willing to put in the work that’s needed to make the business a success. Depending on the arrangement, partners may take a hands-on or hands-off approach. In either instance, they’re willing to pitch in when and how they’re needed. |
Is partnering the right move?
Maybe, but before you decide, you'll need to study the pros and cons of this setup.
There are advantages to having access to more skills, knowledge, and support as you begin running your business. There are benefits to accessing more financial capital, too. If you choose a partner who has cash on hand to invest in the business, you can avoid taking on costly loans or leveraging your assets, two options that introduce expense and risk.
But there are some downsides to partnership for a small business, too. Depending on your arrangement, you may not have the autonomy you want to make decisions and execute your ideas. At least, not without talking with your partner first. And while you and your partner will share in the costs, you’ll also share the profits, which could be minimal at first.
If you decide to go forward with a partnership, try to find partners with the traits your small business needs to thrive.
What should I look for in a partner?
The ideal partner should have skills, experiences, connections, or resources that will help your business. You should be confident in that person’s abilities to team well and act on plans to achieve key goals.
Anyone can have these traits. It could be someone you're vaguely familiar with. It could be one or more of your close professional contacts. And often, people choose family members or close friends to partner with them in the early stages of startup. This last choice comes with some risks. Some people avoid partnering with family members or close friends. This is often because relationships can sour when people don't agree on paths forward. Others prefer to partner with people in their closest circle of connections because they trust one another and know each other’s strengths, abilities, and limitations well. You'll need to take stock of who you want to work with, always prioritizing people with the right sets of skills, resources, and experiences.
How do I organize a partnership to start my business?
To start, you’ll need to decide whether you want to form a general partnership or a limited partnership or if organizing your business as a C Corporation, an S Corporation, or a limited liability company would be a better option. Some of these arrangements aren’t technically partnerships. Instead, they’re methods you can use to organize a business with multiple investors.
Here, you can learn about each type of arrangement and its pros and cons:
General partnership |
| A general partnership is a co-ownership arrangement between two or more people who both have legal and financial responsibility for the business.
How to form one:
What's great about this option:
The drawbacks:
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Limited partnership |
| A limited partnership is an arrangement that includes at least two people or entities. One or more is a general partner with full legal and financial responsibility for the business. The others have liability that's limited to the amount they invest in the business.
How to form one:
What's great about this option:
The drawbacks:
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C Corporation |
| A C Corporation (C corp) is a legal structure for businesses with one or more owners. Through this structure, owners’ personal assets are typically shielded from the business’s debts and financial obligations. Businesses that use this structure have an elected board of directors, adopt bylaws, issue stock, hold shareholder meetings, file annual reports, and pay annual fees related to their formation. They are taxed separately from their owners. The owners also pay tax on the income they receive from the business.
How to form one:
What's great about this option:
The drawbacks:
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S Corporation |
| An S Corporation (S corp) is a legal structure that shares many similarities with the C corp. However, there are two key differences. First, a business organized as an S corp can issue only one class of stock to a limited number of U.S. resident shareholders (presently 100) rather than multiple classes of stock to an unlimited number of shareholders. Second, the S corp itself doesn’t pay tax. Instead, the owners report the business’s revenue as personal revenue.
How to form one:
What's great about this option:
The drawbacks:
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Limited liability company |
| A limited liability company (LLC) combines elements of a partnership and a corporation. Like a partnership, the LLC allows small business owners to avoid paying income taxes because they report the business’s profits and losses on their personal income tax returns. And, like a corporation, the LLC helps protect owners’ personal assets from the business’s debts and liabilities.
How to form one:
What's great about this option:
The drawbacks:
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If you decide on a partnership rather than a C corp or S corp arrangement, you’ll need to create a partnership agreement to start the business relationship. This agreement, which is often drafted by an attorney, often includes these elements:
- The name of your business
- A brief description of its purpose
- The purpose of your partnership
- The duration of the partnership
- The kind and value of the assets each partner will invest
- How you'll share profit and loss
- The pay structure for each party
- How the business’s tangible and intangible assets will be divided if the partnership is dissolved
- Provisions for the dissolution
- Provisions for buying and selling stakes in the business, which should include how the business will be valuated
- The conditions for bringing on new partners
- How the partners will settle disputes (often arbitration or mediation)
- How changes to the agreement may be made
General partnership agreements may also include clauses that explain each party's authority (without engaging the other partner(s)), administrative responsibilities, and restrictions in engaging in outside business activities.
Limited partnership agreements may include unique clauses, too. Clauses may specify when each partner will receive reports and updates on the business; the conditions for returns; and the circumstances and method by which the general partner may buy out a limited partner.
Would you like to speak with an attorney about forming a partnership to start a business? Consider working with Contract Counsel. Check out their website here.
What are my other options for raising capital?
If sharing the ownership of a business doesn’t appeal to you—or if you’d like to consider partnership with other options—look into SBA loans, term loans, asset-backed financing, 401(k) options, portfolio loans, and other options such as angel investors and venture capital. You can learn more about these options here:
Starting a business is a complicated process. We have resources that can help you with every action you need to take. Log into your owner’s portal for a free step-by-step guide to make your venture a success.
