By: Michael Kaiser
Business partnership or alliance? Get this right and build your company.
Here is an imaginary (yet realistic) scenario: after much effort, your company has earned the “growing business” label in your industry. In order to keep its growth momentum, the time has come to choose one of the two alternatives listed below.
Partnerships
A partnership is an arrangement where parties agree to cooperate to advance their mutual interests. In the most frequently associated instance of the term, a partnership is formed between one or more businesses in which partners (owners) co-labor to achieve and share profits and losses.
A business partner is a commercial entity with which another commercial entity has some form of alliance. This relationship may be a contractual, exclusive bond in which both entities commit not to ally with third parties. Alternatively, it may be a very loose arrangement designed largely to impress customers and competitors with the size of the network the business partners belong to.
Of course, there are also downsides to partnerships, the most significant ones being:
“1) The business-related acts of one partner can legally bind all other partners. So it’s essential that you enter into partnerships only with people you trust. It is equally essential that, no matter how much you trust your partners, you execute a written partnership agreement establishing each partner’s share of profits or losses, day-to-day duties, and what happens if one partner dies or retires.
2) A disadvantage of doing business as a general partnership is that all partners are potentially personally liable for all business debts and lawsuits. Each partner is financially responsible for his or her share of the business debt. But in many cases, it is the partner with the greatest assets who loses the most if the business fails. Of course, a good insurance policy can help reduce lawsuit worries, and many small, savvy businesses don’t have debt problems.” (Yahoo)
However, to make up for the above, one of the most important aspects (and advantage) of a partnership is the ability to work under the umbrella of a Limited Liability Company (LLC), described as a flexible form of enterprise that blends elements of partnership and corporate structures.
“An LLC is not a corporation; it is a legal form of company that provides limited liability to its owners in the vast majority of United States jurisdictions. LLCs do not need to be organized for profit. Certain types of businesses that provide professional services requiring a state professional license, such as legal or medical services, may not form an LLC but use a very similar form called a Professional Limited Liability Company (PLLC).” (Wikipedia)
Business alliance
A business alliance is an agreement between businesses, usually motivated by cost reduction and improved service for the customer. Alliances are often bounded by a single agreement with equitable risk and opportunity share for all parties involved and are typically managed by an integrated project team. There are five basic categories or types of alliances:
- Sales alliance
- Solution-specific alliance
- Geographic-specific alliance
- Investment alliance
- Joint venture alliance
“In many cases, alliances between companies can involve two or more categories or types of alliances.” (Wikipedia)
A sales alliance occurs when two companies agree to go to market together to sell complementary products and services. A solution-specific alliance occurs when two companies agree to jointly develop and sell a specific marketplace solution.
A geographic-specific alliance is developed when two companies agree to jointly market or co-brand their products and services in a specific geographic region. An investment alliance occurs when two companies agree to join their funds for mutual investment.
A joint venture is an alliance that occurs when two or more companies agree to undertake economic activity together. It is an agreement whereby the parties agree to develop, for a specific time, a new business entity and new assets by contributing equity, i.e., they share revenues, expenses and assets.
There is a difference between a partnership and an alliance as described below:
“An arrangement between two companies that have decided to share resources to undertake a specific, mutually beneficial project. A strategic alliance is less involved and less permanent than a joint venture, in which two companies typically pool resources to create a separate business entity. In a strategic alliance, each company maintains its autonomy while gaining a new opportunity. A strategic alliance could help a company develop a more effective process, expand into a new market or develop an advantage over a competitor, among other possibilities.” (Investopedia)
Epilogue
There are specific advantages for a growing company to either seek a partnership or a business alliance, but it must be remembered that those advantages are quite different, one from the other. In general, a business alliance should not be undertaken unless you started with a partnership and are protected either by and LLC or S-Corporation shield.
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