Providing Solutions

Should I add a partner to my sole proprietorship?

| Mar 27, 2023 | Business Formation And Planning |

Being the sole owner of a company can be incredibly challenging, and it will likely become more complex as your business grows. One way to address a growing company’s demands is to bring in a partner as a co-owner. Such a strategy can affect your business in several ways.

Another head for business

Having a partner means sharing tasks with someone instead of taking them all on yourself. Your partner can also contribute their knowledge, perspective, and experience to running your business, and as the saying goes, “two heads are better than one.”

However, having a partner means you are no longer the only one making decisions. Sometimes, you might disagree with them, and such conflicts can negatively affect your company when not promptly resolved.

Someone to share the financial burden

Running your business requires spending money to cover business expenses, such as buying new equipment or expanding retail space. You may save money by splitting the cost with your partner, depending on your agreement.

Having a partner also means having someone to share your business’s profits. The more partners there are in your business, the smaller your “percentage” share of the profit (i.e. rather than you receiving 100% of the profits, you may not only receive 50%). However, if bringing in a partner increases the profit significantly, the amount of profit you receive may be more in terms of absolute numbers (50% of $300,000 of profit is greater than 100% of $100,000 of profit).

A different business structure

Once you add a co-owner, your company will likely cease being a sole proprietorship. You can have it become a limited liability company (LLC), a general partnership, or another type of business structure, depending on certain factors, such as the division of profits and responsibilities.

Converting your company to a different structure involves specific steps. For example, changing to a partnership will likely mean you need to draft and submit a partnership agreement. An attorney and tax specialist may be able to assist you in identifying and fulfilling all the required documents and processes for the conversion.