Confession — setting up a partnership business with my friend and (now also a business partner) Kasia was the best decision in my professional life. We’ve been working together as a content marketing duo for over five years now, and the growth opportunities we’ve seen would not have been possible if we worked solo.
Not only are we each others’ emotional support or cover for each other during sick leave or vacation. We also challenge our ideas and generate twice as many ideas on projects.
In this post, I’m going to explain the benefits of establishing a partnership. I also explain the three partnership options you can choose from when setting up shop in the United States, along with recommendations from legal experts.
Table of Contents
What is a partnership business?
A partnership business is formed when two or more people join their resources to start a business and agree to share profits, losses, and risks. Real estate investments, law firms, and physician groups are some of the most common examples.
Partnerships can take different legal forms, including general, limited, and limited liability partnerships. I will discuss each in detail later.
Partners create a written legal agreement outlining roles, responsibilities, and decision-making processes. Partnerships can end for many reasons, like a partner leaving, the agreement expiring, or other business changes.
Benefits of Partnership Businesses
Before I dive into the different types of partnerships, I thought I’d put together a list of the top advantages of these businesses based on my experiences and observations.
Doubling Down on the Knowledge and Expertise
It’s tough to run a business. But you know what’s even harder? Doing it alone.
Neither Kasia nor I know everything (no one does) — we each have our own strengths and weaknesses. Partnering with someone who has complementary skills and knowledge helps fill gaps and expand your expertise.
Google is a great example of how forming a partnership business can result in spectacular success. Its founders, Larry Page and Sergey Brin, met at Stanford University, where they developed a search algorithm that became the foundation of Google. Their complementary skills — Page’s vision for structuring the web and Brin’s expertise in data mining — helped them build a company that transformed the internet.
The secret lies in choosing someone who not only has the right skills and expertise but who you also work well with. Otherwise, you might experience conflicts.
The right business partner can also create a business plan with you. If you need help getting started, here are a few business plan templates that will guide you in this process. You can access them as an interactive one-page PDF or get the full template on both Google Docs and Microsoft Word.
More Business Opportunities and Extra Support
The major downside of being an entrepreneur is the long hours you have to put in, which can lead to burnout. In fact, over 34% of entrepreneurs experience it, and nearly 46% struggle with constant stress — the threat is real.
Recently, I saw a post from one of Surfer’s founders saying they’re taking a sabbatical to recharge after working long hours for years, which impacted their mental well-being.
Since the company has multiple founders, one taking a break won’t hurt the business.
When you team up with the right person (or people), you can count on their support, and that’s just one of the benefits. Experienced partners bring ideas and contacts you might not have access to, which can (or at least should) lead to further business growth.
Fresh Perspective
This benefit might apply to you if, until now, you’ve been working as a solopreneur. Joining forces with a business partner (or a few) can let you see things from a different angle. Since they have their own experiences, they can notice certain business opportunities hidden in plain sight. Or, as I’ve personally seen, they can come up with solutions to problems you’ve been struggling with almost instantaneously.
This is what happened when I worked at a startup about a decade ago. Originally, the business had just one owner, and I was part of a team of three. We were building a digital product for retailers, as well as food and cosmetics manufacturers. However, while we had knowledge on the sector, we were struggling with convincing decision makers at these companies to meet us for a product demo.
Things changed when our boss decided to join forces with a business partner. Not only did he have a lot of contacts at retail and consumer goods brands. He also pointed out where we were falling short in our attempts to convince our target customers of our solution’s potential ROI.
Lo and behold, we were suddenly able to get through to the right people and present our solution. I’d like to underline that we had success not only because the Co-CEO would call in a personal favor — his perspective and insights helped us improve our pitch and reach new leads.
Smaller Relative Costs
In my experience, whenever the topic of money comes up in the context of a partnership business, it’s usually about sharing profits. In fact, a few people whom I spoke to were tentative about setting up a business with someone else for this exact reason.
What they don’t always think of straight away though, is that they also share expenses. So, for instance, instead of paying $250 per month for an essential tool like a CRM, they might be paying just half of that amount if they have a partner.
This distribution of costs can accelerate business development, as it’s more affordable for everyone to make investments. So, while you share earnings with others, working together means you have more resources to grow your business.
Types of Partnerships
Here are the three types of business partnerships you can consider. Please note that I only list structures that apply to U.S. companies.
General Partnership
A general partnership might be the easiest to wrap your head around if you aren’t a legal expert. It’s one of the options you can choose from if you want to set up a for-profit company in the United States.
Joanna Smykowski, a licensed New York state attorney and senior contributor at Custody X Change, told me that it’s often the simplest to establish from a technical standpoint but can also be one of the riskiest. “If something goes wrong, everyone is equally on the hook,” she said.
In this business type, all partners have equal financial and legal responsibility. Costs and earnings are shared equally, but every person is also personally liable for any debts that the partnership generates.
Who This Type of Partnership Business Works For
Smykowski told me that a general partnership might work best for businesses where there’s a strong relationship or trust and a shared vision between partners. It might be best for smaller ventures with limited risks, like a café or small consulting business.
“In essence, in this business type, partners should not only get along but also bring complementary skills to the table,” she says.
For example, one partner might excel at sales and networking, while the other handles operations and finances.
“In these scenarios, a general partnership can allow for flexibility and faster decision-making because there’s no need to deal with formalities like board meetings or corporate resolutions,” Smykowski says.
Smykowski underlines that companies should always remember this simplicity comes with the trade-off of personal liability, so creditors could come after your personal assets if the business goes bankrupt.
Smykowski describes a scenario she saw that involved two friends who started a digital marketing agency. They had worked together in the past, knew each other’s work ethic, and wanted a quick, straightforward way to launch their business.
“A general partnership worked well for them because they trusted each other and didn’t need outside funding. However, they also made sure to draft a detailed partnership agreement outlining their roles and what would happen if the business dissolved,” she says.
Smykowski emphasized that this step is critical. Even in a general partnership, having clarity about roles and exit plans can save a lot of trouble down the line.
Ultimately, trust in these partnership types should be ironclad. “If your business involves significant liability or you don’t feel comfortable being fully responsible for your partner’s decisions, it’s probably not the right structure,” she concluded.
Limited Liability Partnership (LLP)
This type of partnership business protects partners from personal liability. So, if one partner faces a lawsuit, the personal assets of the other partners remain safe.
Some businesses distinguish between equity and salaried partners. The latter hold senior positions and receive compensation, including bonuses tied to the company’s profitability, but don’t have an ownership stake in the firm.
Who This Type of Partnership Business Works For
I spoke with Mark Pierce, founder and CEO at Wyoming Trust & LLC Attorney, who told me that LLPs are the best choice for professionals like lawyers or accountants who want the flexibility of managing their business while protecting their personal assets.
“An LLP limits the liability of each partner to the amount they have invested, ensuring one partner isn‘t liable for the negligence or fraud of another. For instance, I guided a law firm in forming an LLP to operate efficiently without risking partners’ personal assets due to a colleague’s potential malpractice,” said Pierce.
Alex Freeburg, founder of Freeburg Law, also thinks a Limited Liability Partnership is a good option.
“If you’re in a field where personal liability is a concern but you still want to work closely with others, go with an LLP. Especially in today’s day and age with growing concerns of safety, it’s the safest route,” he said.
Why is it a good choice?
LLPs are practical and follow a simple principle — work together while protecting your interests. So, even though you partner with others, you’re not personally liable for their misconduct or negligence, which makes perfect sense.
Freeburg told me that “in my practice, I’ve seen a lot of small law firms go this route. They can share the workload and profits, but if one partner messes up, the others aren’t on the hook for that. You can work without the stress of personal liability hanging over your head.”
Also, it’s worth mentioning the flexibility of LLPs. Unlike corporations, which have strict governance structures, LLPs let you decide how to run the business. You can set up your profit-sharing arrangements and decision-making processes that work best for your team.
Limited Partnership
Limited partnerships (LP) are a solution somewhere between general and limited liability partnerships. In this setup, there must be two or more partners, but at least one of them needs to have the title of a “general” partner. These individuals have full operational control. However, being the ultimate decision maker comes at a (quite literal) price — they have an unlimited liability for any business debts.
Other partners in this structure are also responsible, but they pay off debts proportionally, i.e., to the amount they’ve invested.
Who This Type of Partnership Business Works For
Ramzy Ladah, sole practitioner at Ladah Law Firm, told me that limited partnerships work best for businesses where there’s a need for active management and outside funding, but without giving up control.
“The general partner takes care of everything — managing operations, making decisions, and assuming all liabilities,” Ladah explained. “Limited partners, on the other hand, put in capital but don’t manage anything.”
Ladah brought two examples of industries where limited partnerships might be the best setup. The first one is real estate development. In these businesses, there must be someone who has experience managing certain steps, like handling permits, keeping control over timelines, and communicating with contractors.
“Investors, as limited partners, provide the funds and stay in the background, not dealing with the stress of day-to-day operations,” Ladah said.
It takes the right people to make a partnership business work.
I cannot imagine running a business solo anymore. Whenever one of us goes on vacation or catches the flu, we feel like someone took away half of our creativity and decision-making capabilities. And it’s not a bad thing; it means that our business partnership works.
Kasia and I were lucky enough to meet each other at work, but I realize not everyone can count on serendipity to find their future business partners. So, a word of advice — before you decide to set up a business or bring on new partners to your existing one, make sure you’re a good fit.
Consider the roles and responsibilities, and which type of partnership business will secure everyone’s interest best. This will help avoid potential conflict and support your company’s growth. Good luck!
Disclaimer: This blog post is not legal advice for your company to use. Instead, it provides background information to help you better understand business partnerships. This legal information is not the same as legal advice, where an attorney applies the law to your specific circumstances, so we insist that you consult an attorney if you’d like advice on your interpretation of this information or its accuracy.
In a nutshell, you may not rely on this as legal advice, or as a recommendation of any particular legal understanding.