Considering bringing on a partner? While there are certainly benefits you want to make sure you consider all aspects of such a relationship and look to the long term. Here are five of the best reasons (Pro’s) to organize a business as a partnership, explained in practical, plainEnglish terms: THE PRO’S 1. Shared Capital and Resources A partnership allows multiple owners to pool money, assets, and resources, making it easier to start or grow a business than going alone. Partners can contribute cash, equipment, property, or intellectual property Reduces the financial burden and risk on any one individual Often improves credibility with lenders and suppliers 2. Complementary Skills and Expertise Partners can bring different strengths and experience to the business. One partner may excel at operations, another at sales or finance Better decisionmaking through multiple perspectives Division of labor increases efficiency and focus This is especially valuable in professional services, startups, and small businesses. 3. Simple and Flexible Structure Partnerships are generally easy to form and operate compared to corporations. Fewer formalities and lower startup costs Minimal ongoing compliance requirements Partnership agreements can be customized to fit the owners’ needs Assets can be moved in and out of the partnership with little or no tax implications. This flexibility allows partners to define roles, profit sharing, and management however they choose. 4. Pass Through Taxation Most partnerships benefit from passthrough taxation, meaning: The partnership itself does not pay federal income tax Profits and losses pass directly on to the partners’ personal tax returns Avoids the “double taxation” faced by many corporations This can simplify tax reporting and, in some cases, reduce the overall tax burden. 5. Shared Risk and Responsibility Running a business involves uncertainty, and partnerships help spread risk. Financial losses are shared according to the partnership agreement Emotional and operational pressure is divided among partners Partners can support each other during difficult periods For many entrepreneurs, not having to shoulder everything alone is a major advantage. THE CON’S Here are five of the strongest reasons not (Con’s) to organize a business as a partnership, especially when compared with an LLC or corporation: 1. Unlimited Personal Liability In a general partnership, each partner is personally liable for the business’s debts and obligations. Personal assets (home, savings, investments) can be seized to satisfy business debts Each partner can be held liable for the actions of other partners One partner’s mistake or lawsuit can financially harm everyone Organizing as a Limited Liability Company (LLC) partnership would limit or may eliminate this personal liability. This is often cited as the single biggest drawback of partnerships. 2. Joint and Several Liability for Partner Actions Each partner acts as an agent of the partnership. One partner can legally bind the business without the others’ consent Poor decisions, negligence, or misconduct by one partner affect all partners Disputes with vendors or customers can expose every partner to risk Even highly trusted partners can unintentionally create legal exposure. 3. Potential for Conflict and Management Disputes Partnerships often fail due to internal disagreements, not business performance. Differences in work ethic, vision, or priorities can cause tension Decisionmaking authority may be unclear or contested Resolving disputes can be costly and disruptive Without a strong partnership agreement, disagreements can quickly escalate. 4. Limited Continuity and Stability Most partnerships lack perpetual existence. The partnership may automatically dissolve if a partner leaves, retires, becomes disabled, or dies Ownership transfers are often restricted or complicated Investors and lenders may view partnerships as less stable This can make longterm planning and growth more difficult. 5. Harder to Raise Capital and Attract Investors Partnerships are often less attractive to outside investors. No easily transferable ownership interests like corporate stock Investors may avoid exposure to partnership liability Growth options are more limited compared to LLCs or corporations As a result, partnerships can struggle to scale beyond a certain size. The Agreement A key factor in any successful partnership is its operating/partnership agreement. A good agreement will lay out specific information, purpose, requirements, expectations, responsibilities, how much capital is to be raised and by whom, allocations of profits, losses and distributions, duties and obligations of the partners to the partnership and each other, possible compensation, how new partners are let in and how partners are allowed to withdrawal. You must also consider possible issues that may happen and have a contingency plan to address such things as; how partnership interests are handled, dissolution of the partnership, dispute amongst partners resolution and other items must be addressed in the agreement should a problem arise. Such an agreement can be a very complex document due to all the things that should be addressed so consulting an attorney knowledgeable in partnership law is crucial. Each state has its own requirements thus the attorney needs to make sure the agreement will comply. Also, the IRS itself has things which it wants to see in the agreement. Before any operating/partnership agreement is signed, it should be reviewed by an attorney, each of the partners and a tax professional to see that it is in compliance with all rules and regulations and the partners, themselves, agreed to be bound by it. Before you make the final decision on whether a partnership structure is right for you and your business associates, sit down with a tax professional and an attorney to discuss each of these good and bad reasons. Looking for a financial partnership that thrives on building strong relationships with their clients? Call Steven Brewer today at 812-883-6938 to schedule an appointment. Accountability and results in growing your business.