If your business is growing, you will probably need to take on additional manpower.
If you are a cash rich business with a strong cash flow position, you can buy the skills you need through taking on an employee or using a self-employed contractor or consultant, without giving away any equity in your business.
However, there may be circumstance which make taking on a partner an attractive proposition. Here are some pros and cons of taking on a partner for you to consider before committing to a partnership agreement.
The advantages of taking on a partner
- Creativity. The old adage holds true: two heads are better than one. Taking on a partner can increase creativity.
- Complementary skills and abilities. If you take on a partner with different areas of expertise from yourself, this will strengthen the business.
- Sharing the load. Bringing on a partner will mean sharing the heavy workload of the sole trader and sharing the risk associated with running your own business.
- Motivation. A partner will be motivated to work for the business more than an employee or contractor as they jointly own it.
- Capital input. A new partner will typically buy into a business, bringing an influx of capital which can be used to finance growth.
The disadvantages of taking on a partner
- Equity split. A partner will be taking a share of the profits. This has to be weighed against the additional benefits that they will bring to the business.
- Liability. In a standard partnership arrangement, the partners are jointly and severally liable, meaning that they are jointly responsible for the debts of the business, whoever incurred them.
- Control. Taking on a partner necessarily means some loss of control as you become jointly responsible for decision-making. If these responsibilities are not spelled out at the start, then this is likely to be a source of conflict.
- Disagreements. You may find that your partner has different long-term goals or different working patterns or that you have disagreements about the way things should be done. These are issues which need to be discussed before entering into a partnership arrangement.
- Irreconcilable differences. At some point, one or both of you may want to dissolve the partnership. If you have not agreed on an exit strategy, this could lead to the collapse of the business.
- Partnership tax return. A partnership has an additional level of reporting responsibility. A new partnership must be registered with HMRC immediately and in addition to each partner’s individual tax return, one of the partners must complete the partnership tax return stating the profits of the partnership and each partner’s share.