Understanding Ownership and Distribution of Risk in Business Partnerships

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Starting a business in the Philippines is no easy task. Apart from the complex process of getting permits, licenses, and other requisite documents in the industry you chose, you also need to secure enough funding to get the ball rolling. Unless you can get a large loan from your bank, you’ll need to have someone to help with your pre-operating costs and working capital.

One way to have enough money to start your business is to find business partners. For start-up businesses, partners are essentially investors who become part owners of the business.

For example, suppose you need Php 1 million as capital for a store in a mall, but you only have P300,000 in the bank. You then find three trustworthy and capable individuals who want to become your business partners. Let’s say that two of them will contribute P250,000 each, and one will chip in P200,000. You’ll have the P1 million you need to start your business, and you’ll have earned three partners who’ll share the load of running the business.

Determining Ownership

Business partners co-own a business, but their ownership and share in the profits depend on how much they contributed to the start-up capital.

Using the example above, as you contributed P300,000 out of the P1 million capital, you’ll own 30% of the business; the two partners who invested P250,000 will each own 25%, and the third partner who gave P200,000 will be entitled to 20% of the business’ shares. (Note: Only when you own more than 50% of shares can you become a majority owner). These are also the percentages you get from the business profits.

Some would say that having business partners puts you at a disadvantage; even if you started the business, you can’t make decisions without getting the consent of everyone who pumped money into the venture. Plus, you also have to split the profits with them.

Getting a smaller share of profits may not sound ideal, but you do get an advantage: you’ll have partners who will also share the responsibilities and risks that come with owning a business.

Spreading the Risks

What does spreading risk mean in business? Let’s say three friends co-own and manage a siomai stall. Business was good for the first year, but the sales in their second year started to slow. The owners began to incur debts, like late rent payments and daily stipends for their employees. To keep their business running, the three partners decide to give P10,000 each to pay off their P30,000 debt.

If only one person owned this siomai stall, he would have to shoulder the entire P30,000. However, since it is a business partnership, the risk was spread out among the partners.

Should You Start a Business with a Partner?

There is no definite answer to this question. If you’re going to look at its benefits of shared capital and risks, partnerships are beneficial in a business venture. It also helps to have reliable people who will help you run the business, expand your network, and build rewarding partnerships with key suppliers and business affiliates. But if you have ambitions of being a sole owner who has complete control of the business and enjoys all net profits, you’ll be better off with a sole proprietorship.

What if you can’t afford the capital, but want to be a sole owner? You can seek out investors who will agree to be your silent partners. They can help you raise the money for the business, but they won’t be actively involved in its day-to-day operations. With hard work and smart management, you could make your business grow and increase your profits. In time, when you’ve earned enough to pay back your investors or you could buy them out and get 51% (majority ownership) if not 100% (sole proprietorship) of the business.

Of course, this example is very simplified; the process of buying out partners could be long and complicated. But if you sought out investors who support your dreams, and if you prove yourself a dedicated and capable business owner, it’s possible to transition from being a partner to a solo business owner.

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