Starting a business partnership can be a complicated adventure. With different personalities – with different business backgrounds – coming together, any failure to get it right from start can turn out to be a disaster. Before you make any legally binding decisions, you need to understand and articulate the nature of the relationship – including where misunderstandings and disagreements may arise in the future -. Beyond this, you must consider a few things before forming a new business partnership.
So, let’s get started
- What will your business structure be?
Ask yourself why forming a business partnership is necessary. Are you looking to have a general or a limited partnership? A limited liability partnership should suffice if you are solely seeking an investor. But if you want to create a tax shield for your business, the general partnership would be a better choice. If it’s a limited liability company, who will be the general partner(s), and what will the business form be for that person or entity? Each party should have a clear knowledge of their level of responsibility for fulfilling the terms of the business duties before agreeing.
- What will be the initial contribution of each partner?
Aside from cash, you also need to consider expertise. Business partners should have complementary backgrounds in terms of skills and experience. If you are a technology enthusiast, it is beneficial to collaborate with an expert with extensive marketing experience. If one partner’s main contribution is not money, but their knowledge, this should be understood and spelled out.
- How will the profits and losses be shared?
Will the profit and loss sharing be by shares in the company or some other means? Will the total profits or a portion of it be rolled back into the business to allow for expansion? You should consider how this will be determined before signing any agreement. You also need to consider what each partner’s pay and/or compensation will be. This is not the same as
profits. The difference is that pay is a set amount, while compensation could include both pay and profits, or some other perk that the company provides.
- How will disputes be settled?
How will the dispute be resolved should you and the other partner(s) disagree? Does one person have the final say, or is it by vote if more than 2? Make sure you don’t get the business to a point where you are unable to move forward because of disagreements.
- Understand Your Partner’s Current Financial Situation
Some amount of initial capital is required when starting up a business. So you need to understand the financial situation of your would-be partner(s) before forming a business partnership. Business partners won’t need money from other sources if they have sufficient financial resources. As a result, a company’s debt will be reduced and owners’ equity will rise.
- Do some Background Checks
There is no harm in running a background check even if you trust someone to be your business partner. Background checks are a good idea to check if your partner has any prior experience in running a new business venture. It will tell you how they have performed in their previous endeavors and help you avoid any future surprises. For instance, if your business partner is used to sitting late and you are not, you can divide responsibilities accordingly. Contacting a few personal and professional references will provide a good indication of their work ethics.
- What will happen if a partner becomes incapacitated, die, or exit the business?
Just like any other business agreement, a business partnership demands a prenup. This would outline how the business will continue in case a partner becomes incapacitated, wishes to exit the business, or if a partner dies – and what will happen to that partner’s share of the business.
- The Partnership Should Be Solely Based On Business Terms
Business partnerships should not be based on personal preferences or relationships. Strong accountability measures should be put in place from the very first day to track performance. Each partner’s contribution to the business should be shown through performance metrics and clearly defined responsibilities. Having a weak performance and accountability measurement system is one of the reasons many business partnerships fail. Rather than
working hard, owners start blaming each other for bad decisions resulting in company losses.
- Ensure you Share the Same Values and Vision
Forming a partnership with someone who shares the same vision and values makes the running of daily operations significantly easy. You should be able to make important business decisions quickly and create long-term strategies. Even those who have the same opinions can occasionally differ on crucial issues. In such situations, you would need to remember the company’s long-term objectives.
- Who Will Be In Charge Of Daily Operations
Even in a 50/50 partnership, someone must be in charge of the daily business operations. The right peg should be placed in the right hole from the start, regardless of the individual party’s contribution to the partnership to ensure smooth business operations. This aids the creation of an organizational structure and the further clarification of each stakeholder’s obligations. Each party is more likely to perform better in their function when they understand what is expected of them.
- The Commitment Level of Your Business Partner
While business partnerships generally start with great enthusiasm, some members may lose interest along the way for any reason. Thus, you need to understand the commitment level of your would-be partner before entering into a business partnership with them. At every stage of the company, your business partner(s) should demonstrate the same level of dedication. If they lose interest in the company, it will show in their job and could be harmful to the company as well. The greatest method to keep each company partner’s level of dedication high is to establish expectations for each person from start. You also need to have an idea about your partner’s added responsibilities, which may give room for flexibility in your work ethic.
- Have an Attorney Vet the Partnership Documents
A legal opinion should be obtained before you sign any partnership agreements. It is one of the best ways to safeguard your rights and interests in a business partnership. Each partner
should understand each clause: a poorly written agreement may subject you to liability concerns. Add or remove any pertinent clauses before starting a partnership. This is because it is cumbersome to make amendments once the agreement has been signed.
Business partnerships are a terrific way to share liabilities and increase funding. First, find a partner(s) with whom you can make fruitful business decisions. Otherwise, forming a business with a weak partner(s) can prove detrimental to your new venture.
For a partnership to be successful, knowing all these points in advance, deciding how they will be dealt with, and getting them in writing, can be one of the most important business decisions you make. If you cannot agree now as to these important issues, what makes you think your partnership will be successful in the future? Don’t underestimate the consequences of not doing it. A legal professional can also help to make the best decisions for your business interests.