9 Things to Consider Before Forming a Business Partnership
Getting into a business partnership has its benefits. It allows all contributors to share the stakes in the business. Depending on the risk appetites of partners, a business can have a general or limited liability partnership. Limited partners are only there to provide funding to the business. They have no say in business operations, neither do they share the responsibility of any debt or other business obligations. General Partners operate the business and share its liabilities as well. Since limited liability partnerships require a lot of paperwork, people usually tend to form general partnerships in businesses.
Things to Consider Before Setting Up A Business Partnership
Business partnerships are a great way to share your profit and loss with someone you can trust. However, a poorly executed partnerships can turn out to be a disaster for the business. Here are some useful ways to protect your interests while forming a new business partnership:
1. Being Sure Of 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 looking for just an investor, then a limited liability partnership should suffice. However, if you are trying to create a tax shield for your business, the general partnership would be a better choice.
Business partners should complement each other in terms of experience and skills. If you are a technology enthusiast, teaming up with a professional with extensive marketing experience can be quite beneficial.
2. Understanding Your Partner’s Current Financial Situation
Before asking someone to commit to your business, you need to understand their financial situation. When starting up a business, there may be some amount of initial capital required. If business partners have enough financial resources, they will not require funding from other resources. This will lower a firm’s debt and increase the owner’s equity.
3. Background Check
Even if you trust someone to be your business partner, there is no harm in performing a background check. Calling a couple of professional and personal references can give you a fair idea about their work ethics. Background checks help you avoid any future surprises when you start working with your business partner. If your business partner is used to sitting late and you are not, you can divide responsibilities accordingly.
It is a good idea to check if your partner has any prior experience in running a new business venture. This will tell you how they performed in their previous endeavors.
4. Have an Attorney Vet the Partnership Documents
Make sure you take legal opinion before signing any partnership agreements. It is one of the most useful ways to protect your rights and interests in a business partnership. It is important to have a good understanding of each clause, as a poorly written agreement can make you run into liability issues.
You should make sure to add or delete any relevant clause before entering into a partnership. This is because it is cumbersome to make amendments once the agreement has been signed.
5. The Partnership Should Be Solely Based On Business Terms
Business partnerships should not be based on personal relationships or preferences. There should be strong accountability measures put in place from the very first day to track performance. Responsibilities should be clearly defined and performing metrics should indicate every individual’s contribution towards the business.
Having a weak accountability and performance measurement system is one of the reasons why many partnerships fail. Rather than putting in their efforts, owners start blaming each other for the wrong decisions and resulting in company losses.
6. The Commitment Level of Your Business Partner
All partnerships start on friendly terms and with great enthusiasm. However, some people lose excitement along the way due to everyday slog. Therefore, you need to understand the commitment level of your partner before entering into a business partnership with them.
Your business partner(s) should be able to show the same level of commitment at every stage of the business. If they do not remain committed to the business, it will reflect in their work and can be detrimental to the business as well. The best way to maintain the commitment level of each business partner is to set desired expectations from every person from the very first day.
While entering into a partnership agreement, you need to have an idea about your partner’s added responsibilities. Responsibilities such as taking care of an elderly parent should be given due thought to set realistic expectations. This gives room for compassion and flexibility in your work ethics.
7. What Will Happen If a Partner Exits the Business
Just like any other contract, a business venture requires a prenup. This would outline what happens in case a partner wishes to exit the business. Some of the questions to answer in such a scenario include:
- How will the exiting party receive compensation?
- How will the division of resources take place among the remaining business partners?
- Also, how will you divide the responsibilities?
8. Who Will Be In Charge Of Daily Operations
Even when there is a 50-50 partnership, someone needs to be in charge of daily operations. Positions including CEO and Director need to be allocated to appropriate individuals including the business partners from the beginning.