Business partners can be one of the best relationships ever. On the other hand, it can also be one of the most risky moves you make. Getting into business with any other person means you have to rely on that person for the success of your company. It is not an easy process. A great deal can go wrong. Before you enter into this relationship and partner up, know what the advantages and the disadvantages of the relationship really are. Here are some tips and advice on partnering
The Advantages of a partnership
One of the biggest benefits of entering into a general partnership with another person is that you keep the business under the scope of the state. In other words, if you plan to incorporate the business, you will need to pay your state to register the business. You are likely to pay other sizable fees. Establishing a corporation or a limited liability company also runs the risk of having to make a hefty investment in the business right from the start.
A general partnership is called a pass through tax entity. This means that the business partners are taxed on the business’s income. The partnership is not taxed. It is quite similar to filing your own income tax returns each year. However, you may elect to file your taxes as a corporation at some point if there are tax benefits to you for doing so. Otherwise, reporting income is quite easy to do.
Business Liability: The Good and Bad
This could be a good thing or a bad thing, depending on the situation. When you enter into a general partnership, both partners in the business are equally responsible and legally bound to the agreement. In other words, you are responsible for the business’s debts and liabilities no matter if you personally created them or your partner did. If there is a judgment filed against your business, for example, you and your business partner are equally responsible.
Note that under law, businesses that are partnerships like this do not have separate protection for private assets either. If you enter into a general partnership with your best friend, and your best friend’s creditors work to seize his assets because he did not pay his debts, your business could be part of those seized assets. Further, in some states, your personal assets could also be within the grasp of those creditors.
On the other hand, the good part of sharing liabilities is that you are not solely responsible for any lawsuits or other financial problems that may arise related to the business. If you were in business for yourself, on the other hand, you would be financially responsible for those costs, on your own. With a partner, you have someone to share the financial burden of such events. Of course, most business owners do not take into consideration these elements before entering into the contract. It is possible to have a quality insurance policy that protects you from these highly expensive risks.
The Disadvantage: Not Seeing Eye to Eye
One of the benefits of working in a partnership is that you have two people who can come up with twice as many business ideas. You can both work to achieve virtually anything you want. The problem comes, though, when the two partners cannot see eye-to-eye on important decisions for the business. If you want to expand into one area and your partner wants to expand into another, you will need to come to a compromise or make a decision. In some cases, this can be very hard to do.
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