Why do companies form partnerships

But with partners to share the responsibilities and lighten the workload, members of a partnership often find that they have more time for the other activities in their lives.

Tax advantages. The profits of a partnership pass through to its owners, who report their share on their individual tax returns. Therefore, the profits are only taxed once at the personal level of its owners rather than twice, as is the case with corporations, which are taxed at the corporate level and then again at the personal level when dividends are distributed to the shareholders.

The benefits of single taxation can also be secured by forming an S corporation although some ownership restrictions apply or by forming a limited liability company a new hybrid of corporations and partnerships that is still evolving.

Simple operating structure. A partnership, as opposed to a corporation, is fairly simple to establish and run. No forms need to be filed or formal agreements drafted although it is advisable to write a partnership agreement in the event of future disagreements.

The most that is ever required is perhaps filing a partnership certificate with a state office in order to register the business's name and securing a business license. As a result, the annual filing fees for corporations, which can sometimes be very expensive, are avoided when forming a partnership. Because the owners of a partnership are usually its managers, especially in the case of a small business, the company is fairly easy to manage, and decisions can be made quickly without a lot of bureaucracy.

This is not the case with corporations, which must have shareholders, directors, and officers, all of whom have some degree of responsibility for making major decisions. Uniform laws. One of the drawbacks of owning a corporation or limited liability company is that the laws governing those business entities vary from state to state and are changing all the time.

In contrast, the Uniform Partnership Act provides a consistent set of laws about forming and running partnerships that make it easy for small business owners to know the laws that affect them. And because these laws have been adopted in all states but Louisiana, interstate business is much easier for partnerships than it is for other forms of businesses. Acquisition of capital.

Partnerships generally have an easier time acquiring capital than corporations because partners, who apply for loans as individuals, can usually get loans on better terms. This is because partners guarantee loans with their personal assets as well as those of the business. As a result, loans for a partnership are subject to state usury laws, which govern loans for individuals. Banks also perceive partners to be less of a risk than corporations, which are only required to pledge the business's assets.

In addition, by forming a limited partnership, the business can attract investors who will not be actively involved in its management and who will enjoy limited liability without having to form a corporation and sell stock.

Conflict with partners. While collaborating with partners can be a great advantage to a small business owner, having to actually run a business from day to day with one or more partners can be a nightmare. First of all, you have to give up absolute control of the business and learn to compromise. And when big decisions have to be made, such as whether and how to expand the business, partners often disagree on the best course and are left with a potentially explosive situation.

The best way to deal with such predicaments is to anticipate them by drawing up a partnership agreement that details how such disagreements will be dealt with. Authority of partners. When one partner signs a contract, each of the other partners is legally bound to fulfill it. And if their business cannot afford to pay the bill, then the personal assets of Susan and Jacob are on the line as well as those of Anthony. And this is true whether the other partners are aware of the contract or not.

Even if a clause in the partnership agreement dictates that each partner must inform the other partners before any such deals are made, all of the partners are still responsible if the other party in the contract the computer company was not aware of such a stipulation in the partnership agreement.

The only recourse the other partners have is to sue. The Uniform Partnership Act does specify some instances in which full consent of all partners is required:. Unlimited liability. As the previous example illustrated, the personal assets of the partnership's members are vulnerable because there is no separation between the owners and the business. The primary reason many businesses choose to incorporate or form limited liability companies is to protect the owners from the unlimited liability that is the main drawback of partnerships or sole proprietorships.

By forming a strategic partnership, companies can service larger territories without investing in additional infrastructures or expanding their distribution network. Both companies are exposed to potential new customers and expand their territories without having to add stores or additional routes. This arrangement can also add value to both customer sets. Visitors to the store can save time by not having to visit a coffee shop, and business owners get their office supplies automatically replenished by a company that is coming to the place of business on a regular basis anyway.

Coffee giant Starbucks aggressively forms alliances with places like medical facilities, airports, and other locations to provide coffee service to its customers. Visitors recognize the added value and appreciate the convenience of having brands they recognize readily available. The Starbucks strategy has increased its overall brand awareness and many local and regional companies can easily develop a similar strategy.

There are many ways service companies can offer mutually beneficial services to customers of, say, a local movie theater. If you already have a loyal customer base and would like to broaden your product line you may benefit by aligning yourself with a company that offers complementary products. A good example might be a company who provides computer service partnering with a company that offers audiovisual services.

Each business has its own set of products, suppliers, and systems, and they may have very similar customer bases. Establishing a common purpose sets the foundation and acts as the glue to holding the partnership together. We saw that our existing customers lacked a seamless payment and shipping solution and were wasting precious hours that could have been spent growing their business.

In Canada Post, we found the best partner to launch a convenient, easy-to-use shipping and payment solution for small businesses that saves time and money. The partnership was built on that fact that we both shared a common goal of helping small businesses grow their operations and harness e-commerce as part of their business strategy.

Throughout the partnership, we kept this shared goal as our North Star, and our employees were motivated and excited to create an experience that would positively affect our customers.

Strategic partnerships enable teams to bring the best of their talent and strengths forward. Every person and every business has unique strengths, so honing your partnership strategy to play to those strengths will let you shine. It's rewarding to see how doing so generates functional and creative solutions. We regularly partner with teams internally across geographies to learn from their expertise and apply key learnings to our own market.

When the Toronto Parking Authority launched the Green P Parking app to enable Torontonians to pay for parking from their mobile phone, we teamed up with them to add PayPal as a payment option and promote it across our customer base. The Toronto Parking Authority team excelled in understanding everything to do with parking and we brought expertise in providing a seamless mobile payment experience and marketing skills to drive increased usage.

For a partnership to succeed, an emphasis on clear communication between partners is essential. Leverage internal communication and collaboration channels when working on partnerships within your organization.

For external partnerships, in-person meetings can go a long way in developing a solid working rapport. Open and effective channels of communication between members of the partnership or alliance will ensure there are no misaligned expectations between parties. Big breakthroughs and progress can't happen in silos.

Working collaboratively with partners — within an organization as well as within your ecosystem to solve business problems — generates the kind of energy that fuels growth, innovation and creativity.