Ask most people how they would structure a new business and the chances are that they will talk about starting a company. That’s fine and works a lot of the time but usually only in conjunction with a shareholder agreement.
One of the oldest forms of business structure is the Partnership – and this is often overlooked when people think about starting a business. However a partnership structure does have benefits and used well is simpler to establish, run and wind up.
It is also easier to assign “partnership share” in situations where one person is providing the money and the other is providing their knowledge and experience.
However whilst in theory a partnership is a good way to start in business it isn’t always the best way for the typical entrepreneur to organize a business.
The problem with most partnerships is that they are just like marriages, and as the statistics show over half of marriages end in divorce. Making a marriage work involves handling a volatile mix of partnership issues: ego, money, stress, monthly overhead and day-to-day expenses. Throw in some employees you must manage, and you have a good idea of the work required to make a business partnership successful. But it can be done.
If I haven’t put you off the idea yet (either partnership or marriage) then you need to consider the following list of points to be address which should help you avoid the potential pitfalls:
Share capital instead of expenses. It’s far better to agree who puts what into the partnership in terms of cash, work, time, or whatever. Use the cash element to pay expenses and the time element to earn income. If you each pay expenses as they arise you will soon get confused. In a perfect world your partner will be honest and upright and won’t take advantage – but the world isn’t perfect. So work out an arrangement where expenses are shared in an “associative” way to avoid argument. It also makes it easier to walk away if things go wrong.
Don’t partner with someone because you can’t afford to employ them. This is a partnership killer right from the start. The scene usually is much the same: Joe has a business idea and George has the business skills, but Joe can’t afford to hire George as an employee, so they decide to share duties, expenses and profits. What happens is both Joe and George end up working against each other, and George finds himself liable for Joe’s obligations (financial and otherwise) under the partnership agreement. If you’ve got the idea and someone else has the skill, simply hire him or work out an independent contractor agreement. Don’t give away what you don’t have to.
Get a partnership agreement drawn up and signed. Due to the nature of partnerships, every detail and obligation must be clearly defined, written down, and agreed by all parties. This is best done with a written legal agreement drafted by a well-qualified, mutually agreed-upon lawyer. Just make sure the lawyer is experienced in drafting business partnerships. Keep their business card handy. You may need them again when things go wrong.
Don’t forget other types of partnership such as a “limited partnership” or “limited liability partnership”. One of the main downfalls of a partnership agreement is the fact that each partner is jointly and severally liable for the debts and actions (including criminal) of the other(s). A way around this is to form a limited partnership, where the limited partner is not liable for the actions or obligations of the general partner. An alternative is a limited liability partnership which is a quasi-company in which all the partners enjoy limited liability. Again, take appropriate legal advice on the wording of the agreements.
Agree an exit strategy. Celebrity marriages start with a pre-nuptial agreement as to who gets what if (when?) they split up. In any partnership agreement you need your own “pre-nuptial” agreement, otherwise known as an exit agreement. This allows you or your partner to walk away from the partnership, or provides options to buy out the other party or parties. This can be arranged so it can be done cleanly and simply without destroying the operations of a successful business.
Don’t expect the friendship to outlast the breakup of the partnership. Taking marriage as an example again, how many divorced couples do you know who have truly remained friends? Not many, I suspect. So don’t go into any partnership with a friend expecting to remain friends after a partnership breakup. It may sound great to do business with your friends, but remember, in the business world, it’s always business first and friendships second. Also remember, most times when the business ends then so does the friendship.
Don’t have 50/50 partnership. Every business needs a boss. If you decide to go the partnership route, make it a 60/40 or 70/30 split. Then you and the business have a point person for accountability and overall operational control. (This also holds true if you go down the company route.)
- Choosing the Structure for Your Business
- Starting in Business – Choosing the Structure
- Starting in Business – Taxation of Income
- Starting in Business – You Need a Business Plan
- What Use is a Business Plan?
- Business Disclosure Requirements – What To Put on Your Letterheads etc
- How To Succeed In Business
- Free Business Guides
Category: Starting a Business