From IT pioneers like Hewlett-Packard to notable financiers like Kravis Roberts to retailers like Baskin-Robbings, it is evident that business partnerships are an integral part of entrepreneurship as well as startup success. Here let us check what you need to know before starting a business with a partner.
This is for various reasons: complementing skill sets, shared expenses or equipment, and the notion that one person with funds can couple with another person with intellectual capital so that both come up with a profitable venture.
In theory, a partnership sounds like the best way to start a business. However, the truth is, it is not always the best way for a normal entrepreneur to start their business.
Partnerships are no different from marriages, and if you know about marriage statistics, you know that half of them don’t survive. In fact, up to 70 percent of business partnerships usually fail. Plus, ensuring that the marriage works is quite a job. You deal with such partnership issues as ego, money, day-to-day expenses, stress, and monthly overhead.
All in all, if you’re considering a business partnership, you should first go through the following considerations to see if you are cut out for a partnership.
Considerations to take into account before getting into a business partnership
Let us check out the considerations to take into account before starting a business with a partner.
Consider whether you need a partner
You shouldn’t be looking for a partner just because you’re afraid to get into business alone, or you lack the skills, financing, or connections.
You can get someone to do any of these tasks without having to give them a part of your business. You could either hire a person, or you could find a mentor who will in turn bring in the skills, capital, or the network you need.
Consider customers who compliment you
If you have decided to go the partners’ way, then settle for partners who complement your skills and personality, but also add something different to the palette.
They should also have a passion for growing the business until it succeeds. Analyze the pros and cons of a partner in relation to the business, finances, and industry.
Know your partner first
It is important that you get to know your partner first before getting into the business. Look into their values, financial situation, and their personal goals.
You do not want to work with a partner with who you don’t share the same business values or ethical standards. They may ruin your reputation with other partners or clients.
Looking into your potential partner’s personal vision and goals for the business may not guarantee that you will be completely aligned, but it will help you avoid key discrepancies and irksome surprises.
For this reason, ask for references, check their online presence, or even run a background check on them. Ensure you do this before you get into an agreement.
Ensure you communicate with your potential partner before making a decision. The conversations you have with potential partners should be centered around setting up two-way lines of communication while allowing the involved parties to make their expectations known.
You could also try to work on a discrete project with your potential partner or work with them for a number of weeks before you make the decision to get into a partnership.
So let’s say you make the decision that you want a partner. You have also established that your potential partner matches well with you. Well, there are some legal implications that you’d want to consider before you get into the partnership.
You have to understand that there are different kinds of legal partnerships, consider forms of taxation, establish how you will share profits, and decide how you will handle break-ups in case the partnership gets to that point. For these reasons, you’re better off seeking advice from an accountant and an attorney.
What to do Before Getting Into Business With a Partner
Now, let us see what to do before starting a business with a partner.
1. Draw a written partnership agreement
Partners should agree to put an agreement to writing. A written agreement may not necessarily be a legal requirement in the state you reside in.
However, a well-drafted partnership agreement will not only shield you from personal liability issues, but, it will also make you think about how you and your partner or partners, will set about achieving the implementation of your enterprise vision.
In case issues arise, partners should be able to resolve them while referring back to the agreement. In case there is no agreement, disagreements are usually resolved using the state’s generic partnership law. This law may not always cover all the matters of your business partnership.
2. Establish the roles and responsibilities of every partner
This effort is about working out duties and expectations. Partners may not necessarily work the exact same hours on the business, but it is important that there be a consensus as to the expected time obligations.
You also get to steer clear of resentment that usually emerges when partners begin splitting profits and linking them to individual results and efforts.
This will also avoid strong feelings that are linked to a power structure. Every partner has to be clear on their role, responsibilities, and duties. Furthermore, responsibilities for the day-to-day running of the company should be based on what’s best for the business.
3. Position the partnership towards profit
Profits will come when you come up with a value for your customers. However, there’s the need for commitment from all the potential customers to the enterprise just as yours.
It is therefore important to factor in how you and your partner will be answerable for results. Determine how you will gauge outcomes and performance.
4. Come up with an exit strategy for every partner
As weird as it may seem, you should get into the partnership with the knowledge that it will most likely end someday. As such, you should lay out flexible steps for each partner to leave the partnership when the need or circumstance arises.
5. Establish how you will deal with partnership dissolution
There’s the likelihood that business partners will go their separate ways at some point in the future point.
You must therefore get ready for such a scenario by establishing how each partner will be remunerated, resources shared, and clients served in such an event. Emotions will most likely run high when the partnership doesn’t work out.
As such, you’re better off deciding how to handle dissolution before the partnership is set up or an operating agreement is signed.
6. Choosing a Business Structure
Once you’re done coming up with a partnership agreement, the next step should be selecting a business structure. When choosing a business structure, there are a number of choices to pick from.
They may vary a bit depending on the state law, but normally, the structures include general partnerships, corporations, and limited liability companies (LLCs).
For general partnerships, you normally don’t need to file any sort of formation documents with the state. However, you should know that in spite of the kind of business structure you select, you have to be sure that you are in line with all other applicable state and federal rules concerned with starting a business.
A general partnership is not inclined to pay taxes as its own entity. Instead, losses and income go through the individual partners and they, in turn, pay taxes through their personal tax returns. For this reason, if you want to limit the personal liability for some partners, you might want to consider a limited partnership.
If you decide on forming an LLC or a corporation, you must go through the state requirements when registering. Both corporations and LLCs give limited liability to every owner. This means that their liability is limited only to their investment in the corporation. In some states, the limited liability partnership also offers limited liability to each partner.
In regards to taxes, LLCs are deemed to be pass-through entities. This means that their profits and losses pass to the LLC owners and are reported on their personal returns. Corporations on the other hand file and pay taxes as separate entities at the corporate tax rate.
Partnership killers to avoid
If you are about to get into a partnership, here are some potential pitfalls to avoid:
1. Splitting capital instead of expenses
Anytime you share your own capital, that is, money, property, resources, or information, you, in turn, give away your enterprise ability. Your partner may be tempted to go with this idea as their own. As such, be careful.
To avoid this, come up with an arrangement where you share expenses in an associative arrangement. It will also make it easy to walk away when things go wrong.
2. Partnering because you can’t afford to hire
This is another common partnership killer. The scene plays out like this: Rob has a business idea while Bill has the business skills. However, Rob cannot be able to hire Bill as an employee.
As such, they decide on sharing duties, profits, and expenses. What usually happens is that both Rob and Bill end up working against one another, and Rob finds that he is liable for Fred’s obligations following the partnership agreement.
As such, if you have an idea and you require someone else that has skills, hire them or come up with an independent contractor agreement. There’s no need to give away what you don’t necessarily have to.
3. The absence of a written and signed partnership agreement
Following the nature of partnerships, every obligation and detail should be clearly defined as well as written out, and consented to by all parties. This is usually done through a written legal agreement usually drafted by a qualified and mutually agreed-upon lawyer.
Ensure that the attorney is conversant with business partnerships, and ensure that you take their contacts. You might need them when things go wrong.
4. Not considering a limited partnership
One of the common pitfalls of a partnership agreement is assuming the liability that each partner makes for the other. You can circumvent this through a limited partnership.
In this case, the limited partner is usually not liable for the obligations or actions of the general partner. In such a scenario, ensure that you seek the services of an attorney who knows their way with partnership agreements so that they write this arrangement.
5. Lack of an exit strategy
Even in the real world, big-time marriages usually start with a prenuptial agreement. In business or contractual terms, prenups are linked to exit agreements. In all partnership agreements, lay out the terms for an exit strategy that enables you or the partner to exit the partnership, or provide the option to buy out the other party.
6. Expecting the friendship to go beyond the breakup of the partnership
Again, judging from real-life marriages, how many ex-couples continue as true friends?
Not many, right?
As such, don’t get into partnerships with friends expecting that you will continue being friends after the partnership breaks up.
It may seem like a good idea to get into business with your buddies, but remember, this is the business world, and business is always first friendships second.
Also, remember that most times when the partnership ends so does the friendship.
7. Having a 50/50 partnership
Even in partnership, there’s the need for a boss. If you decide to get into a partnership, go for a 70/30 or 60/40 split.
In this case, your business will have a point person who will be accountable and have overall operational control.
Additionally, keep your buyout or your exit strategy clear. It should also be in your favor, that is, benefitting you while saving you trouble down the road.
You may like to read:
- How much does it cost to start a software company
- 9 Modern Ways to Get Funding for Your Startup In USA
- What Are The Best Business to Start With 100k
- Investing in a Friend’s Business
- Do you Want to Invest in a Business?
- 16 Advantages of Buying an Existing Business
Business partnerships are no walk in the park. Without proper planning, they could end as soon as they start.
However, with sufficient forethought and proper planning on all of the above factors, you can safeguard your partnership from disagreements along the way, which later paved the way to nasty breakups later on.
Be also keen when choosing partners. Even with a laid-out strategy, your partner could sabotage it.
You might also want to seek professional legal advice to ensure that you are fully compliant with your state law and that you are covering all the bases with the partnership agreement. I hope you now got a fair idea of what to know before starting a business with a partner.
Bijay is an entrepreneur and start-up founder having more than 14 years of IT industry experience. He is the co-founder of TSInfo Technologies, a SharePoint development company.
A dedicated professional and very passionate about public speaking and also wrote thousands of technical blogs in various technologies. He also wrote a lots of blogs on entrepreneurship, investment, startup, business, manage money tips, etc.