A:

Small businesses often start as a partnership because pooling the resources and capital of like-minded individuals can be of great benefit to the long-term success of a company. Partners also share in the financial loss of the business if operations do not generate enough revenue, making the business structure less of a risk to each individual business partner. These are clear benefits to creating a partnership, but caveats exist. One of the greatest challenges in maintaining a fruitful partnership is creating a system for effective decision making. To avoid confusion and conflict among partners, business decisions can be made by consensus through a democratic process or by delegation.

Consensus

Under a consensus model, the process of decision making involves all partners in the business. Each partner has the opportunity to share his opinion on a decision and is tasked with presenting all advantages and disadvantages of the proposed decision. The other partners are encouraged to ask questions to fully understand that partner's position and can raise any issues or concerns with a particular proposal. The consensus process is meant to be a comprehensive approach to decision making, focusing on finding common ground among partners and eventually reaching a collective decision. This does not mean decisions are made with unanimity; business partners agree to live with and support a decision based on open and full discussion surrounding the issue.

Democratic Process

Decision making through the democratic process differs from the consensus model in that final decisions on a proposal are made by majority vote. The process leading up to a decision is similar to a consensus; each partner has an opportunity to ask questions, share concerns and present alternatives. The democratic model is meant to promote open discussion, but partners are required to vote in one direction or the other. When there are only two partners in a business, outside business advisers or upper management are used to create a balanced voting pool.

Delegation

In businesses with large numbers of partners, delegation is often used to ensure decisions are made quickly and efficiently. Delegation is the process of deeming certain partners, committees, managers or long-term employees responsible for making certain decisions on behalf of the company. Some partners have specific skills in marketing or advertising, while other individuals have strong backgrounds in finance. The partnership can utilize these specializations by delegating decision making in these categories to the appropriate individual. Checks and balances such as reporting back to other partners soon after a decision is made can help create a collaborative environment that empowers individuals to take an authoritative role in the business. Delegation is far less time-consuming than the consensus or democratic decision-making models.

The consensus and democratic models can take a substantial amount of time but offer the most opportunity for open discussion and negotiation. The delegation process saves time but should be implemented with a system of checks and balances to ensure no individual partner takes too much authority in decision making. Each of these decision-making models can be used as a standalone process or combined with another model to promote partnership efficiency.

RELATED FAQS
  1. What's the difference between limited liability partnership and general partnership?

    Learn the differences between general partnerships and limited liability partnerships; each type has unique traits, benefits ... Read Answer >>
  2. Do joint ventures need an exit strategy?

    Understand why an exit strategy is important for a business partnership such as a joint venture, and learn the options partners ... Read Answer >>
  3. What is the difference between financial forecasting and financial modelling?

    Understand the difference between financial forecasting and financial modeling, and learn why a company should conduct both ... Read Answer >>
Related Articles
  1. Small Business

    Should You Have A Business Partner?

    What are the advantages of having a business partner? What are the advantages of doing it yourself?
  2. Small Business

    4 Business Partnership Mistakes To Avoid

    When two or more people get together to run a business, the odds of conflict and financial risk increase without the proper controls in place.
  3. Taxes

    What's the Purpose of IRS Form 1065?

    Business partners need the information on this form to complete their own tax returns. Here are the details.
  4. Small Business

    MLPs and Limited Partnerships: How They Differ

    Limited partnerships and master limited partnerships have one difference that makes all the difference.
  5. Investing

    What is Carried Interest?

    Carried interest is the percentage of a private equity or a hedge fund’s profits that its general partners receive as compensation.
  6. Insights

    Limited Liability Partnership (LLP): The Basics

    LLPs are a flexible legal and tax entity that allows partners to benefit from economies of scale by working together while also reducing their liability for the actions of other partners.
  7. Financial Advisor

    Tips for Helping a Junior Advisor Succeed

    Bringing on new partners means helping them get acclimatized and showing them the ropes. These tips help get you started on a successful arrangement.
  8. Financial Advisor

    Partners Group: Investment Manager Highlight (PGHN)

    Get an inside look at some of the key executives and the investment approach of the global private equity investment firm Partners Group.
  9. Financial Advisor

    How Advisors Can Help Junior Partners Flourish

    Hiring a junior partner can be beneficial to a financial planning practice. Here's how advisors can help a new hire flourish.
RELATED TERMS
  1. Limited Partner

    A partner in a partnership whose liability is limited to the ...
  2. Limited Partnership - LP

    Two or more partners united to conduct a business jointly, and ...
  3. Schedule K-1

    A tax document used to report the incomes, losses and dividends ...
  4. Partnership

    A business organization in which two or more individuals manage ...
  5. Active Partner

    An invested person who is involved in the daily operations of ...
  6. General Partnership

    A arrangement by which partners conducting a business jointly ...
Hot Definitions
  1. IRR Rule

    A measure for evaluating whether to proceed with a project or investment. The IRR rule states that if the internal rate of ...
  2. Short Covering

    Short covering is buying back borrowed securities in order to close an open short position.
  3. Covariance

    A measure of the degree to which returns on two risky assets move in tandem. A positive covariance means that asset returns ...
  4. Liquid Asset

    An asset that can be converted into cash quickly and with minimal impact to the price received. Liquid assets are generally ...
  5. Nostro Account

    A bank account held in a foreign country by a domestic bank, denominated in the currency of that country. Nostro accounts ...
  6. Retirement Planning

    Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve ...
Trading Center