Small businesses are often partnerships because pooling the resources and capital of multiple individuals pursuing the same goals can be of great benefit to the long-term success of a company. While generally a simplistic concept, partnership business structuring can become complex because of the potential options available. Moreover, how the business is structured will influence how business decisions are made.
Any business with more than one owner is considered a partnership. Partnerships are not taxed. Rather, partnerships require K-1 reporting to pass through all income earned to individual partners. Partnerships can have general and limited partners, which creates division of decision making. They may also be structured with segregated liabilities, which can also help to define responsibilities by individual partners.
Depending on the structure of the company, partners may share in all losses and gains or income may be based on certain specified factors. Most partnerships will have a thorough contractual agreement or Articles of Partnership, which details the business structuring, segregations, liabilities, profit/loss sharing, and more. Overall, one of the greatest challenges in building and maintaining a fruitful partnership is creating a system for effective decision making. To avoid confusion and conflict among partners, business decisions are often made by consensus, through a democratic process, or by delegation. In partnerships that include both general partners and limited partners, the general partners will usually be responsible for all decision making. Other types of liability structuring will also influence how decisions are made.
- Partnerships pass through income and losses to individual partners.
- Partnerships can be structured with varying liabilities, which influences business decision making.
- There are three broad ways business decisions may be made in a partnership: by consensus, through a democratic approach, or by delegation.
- Most partnerships detail their structuring and business decision making in an Articles of Partnership document.
Making Decisions Using the Consensus Model
Under a consensus model, the process of decision making involves all partners in the business. Each partner has the opportunity to share their 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 unanimously. Business partners agree to live with and support a decision based on open and full discussion surrounding the issue.
Making Decisions Using the 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 may be used to create a balanced voting pool.
Making Decisions Using 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 Bottom Line
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 for different types of decision making, as a standalone process, or combined with another model to promote partnership efficiency. The type of partnership that a business chooses will also influence the decision-making processes involved with managing the business and the financial reporting.