Should You Bring Partners Into your Small Business?

Should You Bring Partners Into your Small Business?

Partnerships can be great; much as in life, a business partner can help you with challenges, be a great sounding board, as well as shoulder some of the burdens. Keep in mind, however, that there can also be downturns in any partnership. The key is to understand how to navigate such moments within the context of your business partnership.

To help you understand what may lie ahead in terms of your joint venture, below is a brief guide to some of the things to expect when taking on a partner and also some things that you can do to try and make the journey together with a smooth one.

Before Actually Starting Your Business Partnership

Ideally, your partner is filling a gap; meaning, what areas of expertise, experience, and skills you may lack, the partner in question can provide and vice versa. Essentially, you complement one another. The key is to find someone with whom you fit—there is something to be said for chemistry, even in a business partnership. You need to be confident in your ability to work harmoniously and in your shared vision for the company.

There are actually a few different kinds of business partnerships that you can in fact form. The three most common types are General, Limited and Limited Liability.

With a general partnership, the liabilities and debts, etc. are shared mutually among all partners involved. Limited on the other hand may entail some partners taking a more active role and thus having a greater level of involvement. In this instance, some partners may remain as investors only. While limited liability is a type of partnership that limits each individual's financial responsibility. Basically, each only has some responsibility when it comes to company debts and so forth.

One of the most important things you need to do prior to starting the actual business is to define respective roles. The clearer you can be in this regard, the better off all parties involved. Especially with a general partnership, delineating how labor will be divided and how various responsibilities handled could help avoid conflict in the future. In creating an operating agreement for the business, you should without question outline the division of laborduties among partners.

When you have a business obviously there are going to be debts and liabilities. If you have formed a partnership it is assumed that to some degree (depending on structure/) these will be shared. You should have a frank and open discussion regarding debt and how much each of you is consequently comfortable with taking on.

Why a Partnership?

Starting a general partnership is actually fairly easy. There's no special paperwork that needs to be filed, rather, you simply lay out the terms in your operating agreement. And especially if you set it up as a pass-through entity in which the owners are taxed as opposed to the business itself, this makes the process of establishing your partnership that much simpler.

That's said, as with anything, there are a few drawbacks to having a business partner. For one, with both limited and general partnerships, you as the owners are liable for debts. This means that should something go wrong, either or both could be theoretically sued by one of the company's creditors. When partners contribute assets these then become vulnerable as well, as these are part and parcel of the company itself. So should the business go under, there is no guarantee you will get such contributions back.

Starting Out

Initially, you really want to take the time to determine how to structure the partnership—which of the partnership types will you use to define your relationship to each other and to the company. Beyond that, you also need to figure out how you intend to divide the profits between all relevant shareholders.

Another important early step: naming your new endeavor. If it is a limited liability company, it will generally have an LLP after it. Upon choosing the name, you need to register it within your county/state. And after doing this you can then apply for an Employer ID Number (EID/).

As mentioned earlier, you always want to ensure that the partners' roles, responsibilities and also share percentages are well-documented. What is the value of each partner's share? In the company partnership agreement, be sure to cover this as well as any "what if" scenarios regarding worst-case situations. Finally, you need to look into any requisite licensing and certifications that you and your partner may need for the business at the state, federal and local levels. For something like this, it may be smart to get the help of an attorney.

What to do in a Business Partnership

Small businesses are vulnerable as it is, adds in the fact that you're a newcomer and you have a partner on board and you definitely have a few moving parts involved. In order to make sure your new company stays afloat there are a few steps, you can take and things you can do to help navigate the situation.

Draft that Partnership Agreement

The best contracts make the best partnerships—in this case yours will be a partnership agreement that lays out any and every detail of which you can think. In fact, have it notarized and thus make it official. Should a conflict arise, consult the agreement.

Have an Exit Plan

While certainly, you hope the best for the company, there may come a time when the business has no choice but to close its doors. How will each of you walk away from the endeavor? Spell this out. Or perhaps one of you wants out at some point—are there clauses that allow for one partner to buy the other out? Again an attorney may be a worthwhile investment here.

Have a Boss

While 50/50 partnerships are nice in theory, they lack a definitive leader. Leadership, especially for a new business, is important—someone who's accountable for decision making, general operations, payroll and the like. Consider establishing a 60/40 or 70/30 partnership instead.

First Union is here to help if you have any questions or want advice. Feel free to call us today to talk to one of our advisers!

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