“I feel as though my business growth has been plateauing and I am considering looking into strategic partnerships to accelerate it. On the flip end, I’m scared if the benefits of partnership business are less, compared to the adverse effects it could bring.”
This is the story of Maria, a striving business person after barely 17 months in business. For most entrepreneurs, it’s only normal to get to a stage where giving up becomes a viable option because they have been stuck for far too long in one phase after putting in a lot into the business of their dreams. Long-lived stagnation often makes feel making the Millions or Billions they envisaged at the start of their businesses is only real in the screens.
When at this point, the possible way out for many enterprising persons would business partnership. At least, the business and financial burden won’t rest solely on them this time, or at best, “Two heads are better than one”.
While the thought of business partnerships may be icing on the cake for many businesses, it’s important to consider the pros and cons before stepping in.
Let’s start with the basis
Wikipedia clearly defines a partnership business as a commercial entity with which another commercial entity has some form of alliance.
This relationship is also a written agreement, exclusive bond within which each entity commit to not unite third parties.
Arguably, a partnership business is one of the most common forms of businesses to run in Africa, with several hundred partnerships currently in existence. The story isn’t different in developed nations like the UK, where the most common alternatives are the sole trader and limited company.
Without mincing words, Business Partnership has its positive and negative sides. Looking at the former perspective, it’s a model which enables you to go into business with another party without the formality of a limited company. On the other end, the negative perspective of small business partnership is you’re definitely losing control of the direction of your business of course in situations where you didn’t put adequate protection in place.
That said, a business partnership has its pros and cons.
Less formal with fewer legal obligations
One of the main advantages of business partnership is the lack of formality compared to managing a limited company. The accounting method is usually less complicated for partnerships than for restricted corporations.
The partnership business doesn’t ought to have an organisation official document, however, you’ll still keep records of financial gain and expenses.
A partnership’s tax return, income official document, legal document, legal instrument etc, should be submitted to the appropriate officially recognised business registrar in your country (E.g the Corporate Affairs Commission (CAC) handles this in Nigeria) and every partner can file their own self-assessment tax return as well as details of their profits from the partnership (as well as any other income).
Unless a proper partnership agreement has been entailed, a partnership business can easily be dissolved at any time: this gives each partner the freedom to choose to leave or stay.
Sharing the burden + Growing together
Compared to operating as a sole monger, working in a business partnership makes you benefit from companionship and mutual support. Starting and managing a business alone may be nerve-racking and discouraging at certain points, especially if you’ve not done it before.
Since partnership allows both individuals to have a significant stake in the business, they get to move at their own convenient pace, often looking at to make the best decisions that would drive the business growth, easily and easily agree on how to operate and drive forward the partnership. They’re also free to pursue that without interference from any shareholders.
The more partners there are, the more money there may be available from their combined resources to invest in the business, which can help to fuel growth. Together, their borrowing capability equally tends to be larger.
Better decision-making and collaboration
Each partner can bring his own data, skills, experience and contacts to the business, thereby giving it a better chance at success than any of the partners trading individually.
Compared with operating on your own, the partnership enables the business to benefit from unique and a more perspective brought by each partner.
Collaboration also moves hand-in-hand with partnerships. It enables partners to share tasks, with each specialising in areas they’re best at and enjoy most.
For instance, if one partner features a money background, maintaining the company accounts could be the focus, while another who may have previously worked extensively in sales could champion that aspect of their business.
A sole proprietorship, in contrast, means you’d have to do all of these yourself (or manage someone you employ to do some of it).
In business, two good heads are usually are better than one. This because more often than not, the consensus attained from debating a situation is far better than what each partner may have achieved individually.
However, while there are unit scores of advantages in partnership businesses, this model additionally carries a variety of vital disadvantages.
The business has no independent legal status
A business partnership has no legal existence distinct from its partners. By default, unless a partnership agreement with different provisions is in place, it’ll be dissolved upon the resignation or death of one or more of the partners.
This risk to this is enormous. It ranges from insecurity and instability to ultimately diverting the attention of the remaining partners from developing the business. Even if a partnership agreement is in place, the remaining partners may not be in a position to purchase the outgoing partner’s share of the business. In that case, the business will still likely need to be dissolved.
Again as a result of the business not having a separate legal document, the partners are personally liable for debts and losses incurred. Should the business runs into debts, your personal assets are in danger of being taken over by creditors. This wouldn’t be the case if the business was a limited company.
In a nutshell, you can effectively find yourself paying for the actions of the other partners. If your partners are unable to settle debts, you’ll be responsible for doing so. In an extreme circumstance, wherever you merely own 100 per cent of the partnership, if your partners have no assets you might end up having to settle 100% of the debts of the partnership by selling off your most-prized possessions.
Limited access to capital
While a mixture of partners is probably going to contribute a lot of capital to a business than a sole merchant, a partnership can usually still find it harder to boost cash off course when compared to a limited company.
Banks might prefer bigger accounting transparency, separate legal documents and a sense of permanency that a Limited company provides.
It comes to the point that partnership businesses are seen as higher risk ventures, a bank can either be unwilling to lend or can solely do this on less generous terms.
Potential for differences and conflict
By going into business partnership instead of a sole merchant, you lose your autonomy. You probably won’t always have your way since every partner gets to demonstrate flexibility in the decision-making process. This invariably opens the door for compromise to set in.
There will be the potential for variations, massive or tiny, with different partners especially when it boils down to taking decisions on the strategic direction in which the business should go or money matters.
Although differences may not be evident immediately, over time, partners’ preferences, personal situations and expectations may change. Cliche as it may sound, the fact partners are aligned at the start isn’t a guarantee that one won’t crack later.
While disagreements and disputes can’t solely damage the business, it injures the people concerned. No doubts, a conflict will be a significant distraction, absorbing the partners’ time, energy and money. That’s why is wise to draft a partnership agreement (sometimes known as a Deed of Partnership) when forming the business partnership.
This document ensures the partners’ various rights and responsibilities are enshrined, that there’s a standard understanding of the procedures to be followed during cases of disputes. If the partnership must be dissolved, the partnership agreement must be revised and should dictate what then happens.