A partnership can be a great strategy for those who want to grow their business and share some of the responsibilities of being an entrepreneur.
It can be lonely working as a team of one, and there are times when you wish you had someone to bounce ideas off or get a second opinion. If running your business with a partner (or two) seems like the perfect opportunity for you to grow your business and revenue, a partnership might be the ideal solution.
Partner business structures have advantages and disadvantages that you’ll want to consider before making the jump. So, let’s talk about what to think about before you sign that freshly-minted contract.
What is a partnership in Canada?
Before getting into partnership advantages, it’s essential to go over what qualifies as one in Canada. Essentially, a partnership is where two parties enter into an agreement to manage and operate a business together. These parties are often individuals, but they can also include an entity such as a corporation.
In a broad sense, the term partnership refers to any business endeavour jointly taken by multiple parties. And while the partnership rules can vary by province and the specific type of partnership, there are three main business structures for partnerships:
- Limited liability
The most popular way of forming a partnership is through a general partnership. This is where two or more parties get together to manage and run a business, and all parties equally share profits and liabilities.
Each individual partnership is personally liable for the debts, contractual obligations and torts related to the business. It’s the partnership equivalent of a sole proprietorship.
A limited partnership agreement involves one or more partners with unlimited liability where the partner is personally liable for the business’s legal and financial obligations. Plus one or more limited partners where their personal liability is limited, depending on their contribution.
You most often see limited partnerships in cases where a corporation acts as the general partner with two or more individuals acting as limited partners. These limited partners—sometimes referred to as silent partners—contribute money and occasionally advice to the business. But their contributions must remain limited, or they risk losing their limited liability status.
Limited Liability Partnership or LLP
Limited liability partnerships are most often seen in high-risk professions like the law, accounting or medical industries. In fact, in some provinces, this partnership status is limited only to those types of professions.
This partnership agreement gives each of the parties limited liability. If a client sues, only those business partners who work with that specific client (or on the specific project) are liable. This works because these professions often see partners with minimal overlap—typically, there is a team of lawyers on a case or a single doctor acting as a practitioner.
Advantages of a partnership
When it comes to forming a partnership business, there are a few serious advantages that you should consider. There are real reasons to consider bringing on a partner: from monetary gain to increased skill set available to your business operations.
But not all of the advantages of having partners have a clear way of measuring them. Some things, like adding moral support and creating more work-life balance, are less measurable but still important. Regardless of why you might be considering a partner, here are a few advantages you should be thinking about:
More expertise and skill
We only know what we know. There’s no time or capacity to learn every skill that will help bring your business maximum growth. But bringing partners into your business can help you fill those gaps where you don’t quite excel.
You can’t excel at everything. If you’re particularly skilled at the creative aspects of your business but aren’t so hot with organization and overseeing the finances and cash flow, having one a partners with that skillset is one of the clear advantages of a partnership agreement.
Adding additional parties to your business management and operating your team can help you build those skills that you lack. When it comes to forming a partnership, you’ll most likely want to look for people whose skills complement each other.
Having a strong partnership team that excels in different areas can help your business go further and see growth happen at a much faster rate.
More cash and cost savings
More partners mean more capital. It tends to be as simple as that.
In most cases, adding additional parties to your partnership agreement means injecting more cash into the business. Beyond that, a partner can help you raise more money through their contacts or by lending their expertise. And they might even be able to enhance your ability to borrow more from third-party sources.
Injecting additional capital into the business aside, a partner can also help keep more cash in your pocket as well.
Each partner shares the financial burden related to the business. That means that manning the expenses and paying for capital expenditures isn’t solely up to you. While it’s not exactly cost-saving for the business, having a business partner could mean leaving more money in your pocket.
Really, who doesn’t want a little extra cash?
Wider range of opportunities
When you’re operating a business solo, your time is pretty limited.
You’re restricted with the number of projects and clients you can take on simply because there is only one of you and a lot to do. Adding even just one partner can help you figuratively add hours to your day and allow you to take on more business where you couldn’t otherwise.
Your team becomes more productive when you have more owners on board, which means you ultimately have the freedom to pursue more opportunities and bring in more money.
Not only that, but partnerships can bring on additional opportunities that you might never have access to on your own. Your partner presumably has a contact book that differs from your own, which means that they might give the business access to different prospective clients and jobs that could bring on serious growth.
Forming a partnership strategically with someone who has access to industries and companies that your business could serve well can be a great way to grow your brand and your revenue.
Even in the situation where you have unlimited liability (i.e. you’re responsible for everything that happens) in a general partnership, the burden is technically shared. That means if something does happen, you’re not in hot water alone.
Now, do you want to be in hot water? No. Should you probably have insurance to help in situations as such? Absolutely. But, at the end of the day, there is something to say about not holding the full responsibility of a business square on only your shoulders.
Sharing the burden with a partner really does go further than just the sticky situations. When it comes to both profits and loss (more specifically losses), all partners risk and receive the same. So, even in the toughest of situations, there’s presumably someone that has your back.
Fresh set of eyes
Business owners can sometimes get sucked into this tunnel where they can only see what’s in front of them. It’s really easy to get into a zone where you have blind spots and can’t find the right solution to your facing.
But a partner can provide a fresh set of eyes. The lived experience you don’t share can be as valuable as the stuff you see eye-to-eye on. Considerable growth can come when you change your legal structure to a partnership and add a fresh set (or a few) to the team.
Everyone approaches problems with a different mindset and idea. So, your partners can serve to inspire you and help grow your business in ways that you truly never imagined.
Business can be a really lonely game, especially if you’re a team of one.
You can get stuck in a rut when setbacks ensue (and they certainly do in business) or when you face a challenge (or even a problem client). Dealing with these scenarios alone can feel isolating and, at times, overwhelming. But having a partner can make the experience that much better.
But moral support goes both ways.
It’s not all about dealing with problems and working through frustrating situations. Having a partner means you have someone to celebrate your business success with as well. There’s something to be said about getting to crack that champagne bottle with a team when things just seem to go your way.
Increased work-life balance
Work-life balance is important. A partnership means being able to step away from your desk without worrying that the entire operation is going to bite it while you have a Mai Thai on the beach.
A business partnership can help lighten the load when one party needs to step away from work to reset and relax because there is always someone there to man the helm. This is one of those advantages that’s harder to measure, but it can positively impact your personal life.
Possible tax benefits
Finally, when it comes to the advantages of a partnership agreement, you might see possible tax benefits. While it’s best to consult your financial professional or accountant when it comes to deciding a partnership business is a good idea for you, there are potential advantages to your business tax returns.
Not only that but with a partner, you are also not the sole party responsible for the business taxes. This could bode well for your personal income taxes, as it could help make them easier and ultimately cost less.
Disadvantages of a partnership
Unfortunately, it’s not all rainbows and roses when it comes to partnership. There are both advantages and disadvantages of a business partnership.
Having a partner in your business means that you need to give up control and take additional liability, so it’s worth mentioning that it’s a serious decision. Before you have a new partner sign on the dotted line, here are a few disadvantages of a partnership that you should consider:
In a lot of cases, shared liability is a good thing. But in some instances, it can also be a bad thing.
When you run a business by yourself, you are personally responsible for all of the issues that come up with the business. But usually, you’re the one that does the work, so while it’s not great to get into hot water, you’re really only liable for your own actions (or those performed by contractors or other hired team members).
But with a business partnership, that’s not the case.
Shared liability means that you are now also responsible for the actions of all of your partners. If they make a mistake or a client perceives that they have, that will also fall on your shoulders (unless you’re in one of the few industries that allow for the limited liability partnership).
So while shared liability distributes the burden to more than one party, it also means you take on the additional responsibility for someone else’s actions.
Loss of autonomy
One of the biggest disadvantages of partnership for business owners that were previously flying solo is the loss of autonomy and full decision-making power. It really can be hard to give up control of your business.
A business partnership means compromising on your business decisions and working through differences of opinions and ideas with other parties. It’s no longer a “what I say goes” scenario. A partnership must be an even playing field where everyone’s opinion counts.
Deciding to take on partners means you need to determine if you’re willing to give up some of the decision-making power you hold. Is it worth it?
Increased potential for conflict
Along the same line of losing your autonomy is the increased potential for conflict.
Unless you’re partnering with AI (which is probably not allowed), you’ll need to prepare yourself to deal with conflict. No matter how on the same page you and your new partner are, there will still be times where you will need to work through conflict.
These can range from a difference in personal opinion to feeling like there’s an unequal effort to run and work on the business.
This means you need to be careful when it comes to choosing partners. You’re looking for those that have similar values and a work ethic like yours. Plus, you’ll want to work alongside someone who shares the same vision and end goal for the business that you have.
You want to make sure you work well together. Without that, your partnership could be headed for disaster.
Future complications with selling
There might be a time that comes when you’re ready to sell your business—which is precisely why you want to partner with someone who shares the same vision and end goal for the business as you do.
Adding a partner means that selling a business in the future will be more difficult, especially if not everyone sees eye-to-eye on that process.
Circumstances are bound to change either on your end or that of your partner, so it’s a good idea to include an exit strategy in the original partnership agreement when it comes to changing the business structure.
This can help you avoid future conflict on the matter. Or, more accurately, provide you with a tool to work through it.
Speaking of situational changes, a fluctuation in your new partner’s situation can mean increased instability for your business. Life happens, but instability in business can be a killer when it’s not handled properly.
When deciding whether adding a partner to your business operations is a good idea, it’s prudent to think about how you’d handle a change to your business’s stability.
If you’re not particularly skilled at handling unforeseen circumstances and challenges, handing off some of the power in managing your business to someone else might not be the best idea. Partners must work together, especially when times get tough.
Loss of personal profit
In partnership, sharing means sharing everything. That includes your hard-earned profits.
While there is a considerable benefit when it comes to sharing the financial burden of running a business with a partner, it also means sharing the business’s profits.
While the overall business profit might go up, your personal share of the profits may go down. Hopefully, this is a limited reaction to the addition of new parties to the business, and eventually, your new robust team will bring in more profit for everyone involved.
Are there partnership advantages for you?
Running a partnership business has clear advantages and disadvantages, and it’s not the right fit for everyone. Having a partner means having more access to skill sets, more money and shared liability, but it also means compromising and taking on additional liability in some aspects.
It’s important to carefully weigh the pros and cons and talk about the benefits and drawbacks with advisors (and financial professionals) before you take the leap. But if the prospective parties you have in mind check all of your boxes and you believe they will truly help you grow, then perhaps it is time to prepare that partnership agreement and register your business.
This article offers general information only, is current as of the date of publication, and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While the information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by RBC Ventures Inc. or its affiliates.