Entering into a business partnership has its advantages. This allows all contributors to share stakes in the business. Depending on the partner’s risk appetite, a business can have a general or limited liability partnership. Limited partners are only there to provide funds for businesses. They have no say in the operations of the business, nor do they share responsibility for the debts or other obligations of the business. The General Partner operates the business and shares its obligations as well. Since limited liability partnerships require a lot of paperwork, people usually tend to form general partnerships in businesses.
Things to Consider Before Establishing a Business Partnership
A business partnership is a great way to share your profits and losses with someone you can trust. However, a poorly executed partnership can be disastrous for a business. Here are some useful ways to protect your interests when forming a new business partnership:
1. Sure Why You Need a Partner
Before entering into a business partnership with someone, you need to ask yourself why you need a partner. If you are just looking for investors, then a limited liability partnership will suffice. However, if you are trying to create a tax shield for your business, a general partnership would be a better choice.
Business partners should complement each other in terms of experience and skills. If you are a tech buff, working with a professional with extensive marketing experience can be very rewarding.
2. Understand Your Partner’s Current Financial Situation
Before asking someone to commit to your business, you need to understand their financial situation. When starting a business, there may be a certain amount of start-up capital required. If business partners have sufficient financial resources, they will not need funding from other sources. This will lower the company’s debt and increase owner’s equity.
3. Background Check
Even if you trust someone to be your business partner, there’s nothing wrong with doing a background check. Contacting several professional and personal references can give you a fair idea of their work ethic. A background check helps you avoid future surprises when you start working with your business partners. If your business partner is used to sitting late and you are not, you can divide the responsibilities accordingly.
It’s a good idea to check if your spouse has previous experience running a new business venture. This will tell you how they performed in their previous attempts.
4. Ask Lawyers to Check Partnership Documents
Make sure you take a legal opinion before signing any partnership agreement. This is one of the most useful ways to protect your rights and interests in a business partnership. It’s important to have a good understanding of each clause, as a poorly written agreement can get you into liability problems.
You should make sure to add or remove relevant clauses before entering into a partnership. This is because it is difficult to make amendments after the agreement is signed.
5. Partnership Must Be Based Solely On Business Terms
Business partnerships should not be based on relationships or personal preferences. There should be strong accountability measures in place from day one to track performance. Responsibilities should be clearly defined and performance metrics should show each individual’s contribution to the business.
Weak accountability and performance measurement systems are one of the reasons many partnerships fail. Instead of putting in their efforts, the owners started blaming each other for the wrong decisions and resulting in the loss of the company.
6. Your Business Partner’s Commitment Level
All partnerships start off friendly and with great enthusiasm. However, some people lose joy along the way because of the daily hard work. Therefore, you need to understand the level of commitment of your partner before entering into a business partnership with them.
Your business partners must be able to demonstrate the same level of commitment at every stage of the business. If they don’t stay committed to the business, it will be reflected in their work and can hurt the business as well. The best way to maintain the level of commitment of each business partner is to set the desired expectations of each person from day one.
When entering into a partnership agreement, you should have an idea of your partner’s additional responsibilities. Responsibilities such as caring for elderly parents should be given due thought to setting realistic expectations. This leaves room for compassion and flexibility in your work ethic.
7. What Will Happen If Partners Go Out of Business
Just like any other contract, a business venture requires a prenup. It will outline what happens if a partner wants to go out of business. Some of the questions to be answered in such a scenario include:
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How will the outgoing party receive compensation?
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How will resource sharing occur among the remaining business partners?
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Also, how will you divide the responsibilities?
8. Who Will Be Responsible For Daily Operation
Even when there is a 50-50 partnership, someone has to be in charge of the day-to-day operations. Positions including CEO and Director need to be allocated to the right individuals including business partners from the outset.
This helps in creating the organizational structure and further defines the roles and responsibilities of each stakeholder. When individuals know what is expected of them, they are more likely to perform better in their roles.
9. You Share the Same Values and Vision
Entering into a business partnership with someone who shares the same values and vision makes running day-to-day operations incredibly easy. You can make important business decisions quickly and define long-term strategies. However, sometimes, even the most like-minded individuals can disagree on important decisions. In such cases, it is important to remember the long-term goals of the business.
The main thing is
Business partnerships are a great way to share obligations and raise funding when setting up a new business. To make a business partnership successful, it is important to find a partner who will help you make decisions that are beneficial for the business. So pay attention to the integral aspects mentioned above, as a weak partner can prove to be detrimental to your new venture.