Any business owner will tell you that running a business is no easy feat. There are a lot of moving parts and pieces that need to come together to make a business successful. One of the most important aspects of running a business is strong partnerships.
We will explore the importance of partnership in business and the benefits and risks associated with partnerships. Read on to learn more!
What Is Partnership in Business?
A business partnership is a formal agreement between two or more individuals who wish to conduct business together. The partners agree to share the business’s profits, losses, and management.
There are three types of business partnerships:
- General partnership: all partners are equally responsible for the business.
- Limited partnership: one or more partners have limited liability.
- Limited liability partnership: all partners have limited liability.
What Is the Role of Partnership in a Business Organization?
The role of partnership in a business organization can be divided into three main categories:
Financial partnerships help businesses raise capital. For example, if a business needs to buy new equipment but doesn’t have the cash on hand, it can partner with another business with the money. The two businesses would then share the profits from the new equipment.
Managerial partnerships help businesses share the burden of managing a company. For example, two businesses might decide to open a joint venture. This partnership would allow them to pool their resources and knowledge to manage the venture better.
Marketing partnerships help businesses reach new markets. For example, a company might partner with another business with access to a different customer base. In turn, the new customers would generate profits for both businesses.
Why Are Business Partnerships Important?
Business partnerships are important for several reasons, some of which include:
Collaborating with other businesses can give you a competitive advantage. A recent study has shown that form partnerships are more likely to survive and grow than businesses that don’t.
Reach New Markets
Through partnerships, businesses can reach new markets they wouldn’t have had access to. This is because partnerships give businesses a larger customer base and a wider distribution network.
Partnerships can help businesses stabilize their revenue. Partnerships give businesses a diverse customer base, which can help offset the effects of seasonal changes or economic downturns.
Partnering with another business allows each company to focus on what it does best. For example, one company might handle manufacturing while the other handles marketing and sales. This division of labor can lead to increased efficiency and output.
Risks & Benefits of Partnership in Business
Like any business decision, there are risks and benefits associated with business partnerships. Therefore, it’s necessary to consider both before entering a partnership.
Risks of Partnership in Business
The three main risks involved in a business partnership are financial, legal, and personal.
Business partnerships can be a financial risk for both parties involved because each business is responsible for its debts and liabilities. If one business goes bankrupt, the other business may be liable for the debt.
Partners are jointly liable for any debts or liabilities incurred by the partnership. Therefore if one partner faces legal action, the other partner may also be held responsible.
Partnerships may pose personal risks to the involved partners. Business partners may have disagreements about the direction of the business, and these disagreements can lead to tension and even dissolution of the partnership.
Benefits of Partnership in Business
Here are some of the benefits of a business partnership:
Faster Growth and Development Opportunities
Partnerships allow companies to grow faster than they would be alone because more people work together toward common goals, which means more work gets done. More opportunities arise for everyone involved as a result of their shared efforts.
Reduced Your Risk Exposure
Most of your risk is personal and financial if you’re a sole trader.
In a partnership, the other directors will share responsibility for these things too – which means they could take over some of the burdens if things go wrong (and vice versa).
Partnerships can provide increased visibility for both parties. As both companies promote their collaboration through advertising campaigns and other marketing methods, customers will be more likely to recognize their collaboration. Through this, both parties can increase sales over time.
Advantages and Disadvantages of Partnership
There are several advantages and disadvantages of partnership to consider before entering into this type of business arrangement.
In a partnership, partners can share the cost of resources, such as office space, equipment, and staff. As a result, they’ll save on costs and allow each business to operate more efficiently.
Recently, there has been an increased focus on work/life balance. A partnership can offer business owners more time for themselves and their families by sharing the workload with another business owner.
Partnerships can offer tax benefits to the businesses involved. For instance, the United States does not tax partnership profits. Instead, the profits are “passed through” to the partners and are taxed on their personal tax returns.
Some disadvantages of a business partnership include:
Loss of Autonomy
When businesses form a partnership, they may lose some of their autonomy in decision-making, especially when partners may have different opinions about how the business should be run.
In a partnership, each partner is jointly liable for the debts and liabilities of the business.
Vague Roles and Responsibilities
Partnerships can sometimes be challenging to manage because roles and responsibilities are not always clear. This vagueness can lead to tension and conflict between partners.
Small Business Partnership Examples Of 2022
Let’s take a look at some examples of small business partnerships:
The Pioneer Woman & Old World Spices & Seasonings Inc.
The Pioneer Woman is a famous food blogger and TV show host. Old World Spices & Seasonings Inc. is a spice company that specializes in gourmet spices and seasonings.
The two companies have teamed up to create a line of Pioneer Woman-branded spices and seasonings.
Taco Bell & Doritos
The two brands have collaborated on various products, including a taco-flavored Doritos Locos taco and a taquito-flavored Dorito. Most recently, the two companies announced a new line of tacos inspired by Doritos.
They’ll be available in three flavors: Flamin’ Hot Cool Ranch Doritos Locos Tacos, Cantina Crispy Chicken Tostada, and Cantina Crispy Chicken Tacos.
There are numerous advantages and disadvantages of partnership to consider before entering into this type of business arrangement.
Cost savings, work/life balance, and tax benefits are some advantages. Disadvantages include loss of autonomy, increased liability, and vague roles and responsibilities.
Ultimately, the decision to form a partnership should be based on careful consideration of all of these factors.