One popular way to begin an entrepreneurial venture is to form a partnership. A business partnership formed without necessary forethought is likely to fail, but with the proper planning and consideration, a partnership can be profitable.
Partnerships are the simplest and least expensive of co-owned business arrangements. Additionally, businesses with multiple owners are more likely to survive longer than sole proprietorships, says Economist Brian Headd of the U.S. Small Business Administration.
Forming a partnership can either be a good or bad thing, depending on the parties and circumstances involved.
Some pros
- Partners share the cost of a start-up.
- They share responsibilities and work.
- They share business risks and expenses.
- The complementary skills and additional contacts of each partner can lead to the achievement of greater financial results together.
- Partners can offer mutual support and motivation.
Some cons
- Partners in a general partnership are jointly and individually liable for the business activities of the other. If your partner skips town, you’ll be liable for all the debts, not just half of them.
- They share any profits.
- You do not have total control over the business. Decisions are shared, and differences of opinion can lead to disagreements, one partner buying out the other one, or even a dissolution of the union.
- The wrong partner can negatively affect your reputation.
- A friendship may not survive a partnership. Keep in mind John D. Rockefeller’s famous words: “A friendship founded on business is a good deal better than a business founded on friendship.”
Before entering into a partnership, it would be best to first determine whether or not you are suitable for this type of arrangement and, if so, to thoroughly investigate possible business partners.
Are you the business partner type?
Do you prefer to do things solo? Be aware that the longer you’ve worked for yourself, making decisions with compromise is more difficult.
Is your prospective business partner a good match?
A business match is much like a marriage. Just as one would normally take great care in the selection of a mate, you must be careful with a prospective business partner. Here are some questions to ask yourself to find out if you’re compatible:
- Do we have the same motivation, values and similar work habits?
- Do we have a similar vision, ideas and objectives about how to run the business?
- Is each of our strong points and skills complementary to one another?
- Are we both able to communicate well with one another in a pleasant, respectful and comfortable manner?
- In your gut, do you trust this individual?
You will also need to do some research about your prospective partner. Check out the individual’s background thoroughly by, for example, talking to former employers or business partners.
Avoid any potential problems by making sure duties and responsibilities of each partner are detailed in a legal agreement. This agreement should include how much capital each will contribute; who owns what; how decisions will be made, profits will be shared, disputes will be resolved; a buy-sell agreement; and who will be entitled to what if the partnership doesn’t work out. Be sure to involve a lawyer and an accountant from the outset to help form your partnership and to draw up legal agreement to avoid unexpected circumstances.
