The right business partnership can be professionally satisfying and extremely lucrative. But like any relationship, working with a business partner successfully over the long term means going in prepared and with the proper groundwork in place. Here are some common partnership mistakes you’ll want to steer clear of.
Failing to determine in advance
- whether to equally share ownership of and authority over your business,
- how to establish company voting rights, and
- whether to give a small ownership percentage to a third partner for tie-breaking purposes in the event of a disagreement
Pursuing the Wrong Partnership Structure
In most cases where you and somebody else start a business together, it’s considered a general partnership unless otherwise agreed. A general partnership:
- is easier to set up than a limited partnership,
- includes two or more actively involved partners, and
- is the least complex choice for companies without passive investors
As a general partner, you’ll not only co-manage your business, you’ll assume an ownership role that includes responsibility for its assets, debts, profits, and taxes. Limited partners typically serve as investors only, with no real control over your company.
Not Seeking Legal Advice
Understanding your legal obligations and liabilities as a business partner is essential before you enter into an agreement. As we’ve seen, general business partners need to be prepared for a certain amount of shared financial accountability. Especially since both you and your partner will have the right to act on behalf of your company – and that includes activities like taking out loans.
While many aspiring entrepreneurs choose to put their limited capital toward marketing and product development, the fact is that investing in legal expertise can save you and your partner significant stress and money down the road.
Skipping the Written Agreement
Going into business with a partner – but without a partnership agreement – is probably the biggest mistake you can make as a new business owner. A written business partnership agreement not only allows you to make the most of your combined skills and capital, it clarifies the parameters of your professional relationship.
Mapping out your business arrangement is best done with the help of a qualified small business lawyer, and will typically address such elements as:
- the purpose of your business,
- the tasks and responsibilities of each partner,
- how business decisions will be made,
- how disputes will be resolved,
- the division of income, and
- how changes to the partnership structure – including a buyout – will be handled
If you and your partner plan to seek financing, be sure to have your business agreement drawn up before you approach potential lenders or investors.
Failing to Consider an Exit Strategy
Your partnership agreement should answer specific questions about what will happen when either party wants to leave the business. For example:
- Who will a partner be permitted to sell their business interest to?
- How will each partner’s interest be valued?
- How and when will a partner be paid out if they choose to give up their interest?
- What happens to a partner’s interest if they become incapacitated?
Having these details ironed out in advance will also make it easier should you decide together to sell your business to somebody else.Want