Starting your own business is a good idea, but uncertainty in business climate has led more people to pool resources and go into business together. Such an entrepreneurial impulse can be applauded. Great companies can be founded on good partnerships. However, great companies can as well be destroyed by bad partnerships. The advantage of a business partner is the ability to make the most of the complementary talents and shared resources of other partners in a business. But, making partnership is more than just two entrepreneurs teaming up to work together. Due to legal implications, it is advisable to consider the following before establishing a partnership with another person.
Legal Structure Of Your Business
While entering into a partnership can be the right way of pulling available resources between the involved parties, a poorly structured and non-researched partnership agreement can lead to future liability issues. It is recommended to get an experienced lawyer from a recognized law firm to help in forming the legal structure of the business. A business venture can be legally structured for any amount of time according to business law but should include the modalities of how it will grow for the next at least five or more years. Additionally, it’s advisable to devise an exit strategy that should be a win-win for each player if circumstances arise.
Percentage of Ownership
Sharing resources is excellent, but sometimes it comes with a cost. Before opening, there should be records of how much each partner is bringing on board. The contributions should be used as the basis for the percentage of ownership, but in some cases, this may not apply. For example, a partner may not invest in cash but contribute in terms of sweat equity; a second partner may put in a large amount of money but no plans to work in the business. As such, one partner may get a more significant percentage than the other. A 50-50 profit split may sound fair at the start, but with time resentment can arise when partners start tracking profit back to individual efforts, workloads, and results. From the onset, decide roles and responsibilities each partner will have and also figure out how you will hold each other accountable for results. Lay down the indicators that you will use to track and measure performance and how value in efforts or results will be measured and monetized.
A business partnership, just like marriage, requires a prenup on how to resolve partnership disputes or disagreements. Some issues must be addressed thoroughly, and the best way to go about it is to include a mediation clause in the agreement. The agreement should consist of a procedure for resolving major disputes. Both parties must be prepared for such a scenario and have a document to safeguard their interests as part of the agreement. The documentation should outline what will happen if both partners reach a point where they can’t agree, or one person wants to leave. How will the resources be divided? How will they be compensated? Will both of you head to court, or who will serve as the mediator to get issues settled and reach a win-win solution?
Deciding on a partnership business is more or less like making decisions in a committee, nothing may get done. In some instances, it can stalemate the company and cause it to fail. Therefore, both partners need to establish a transparent decision-making process before to be sure that the operations of the business will run smoothly. Any ship must have a captain, and so do businesses. For a partnership business to succeed, it needs to have a person in charge. The decision on who will be in-charge must be made early on, and any other person in the partnership must be made clear on their duties and responsibilities.
The Death of a Partner
It is not something many people would want to think about, but there are some chances that both partners won’t outlive a business. It is essential to consider what may happen if one partner is deceased. To take care of such, have a buy/sell agreement from the start. Such considerations will establish how the partnership interest can be valued and get purchased by a new interested party or by the partnership. After coming up with the legal structure of your small business, legal documents should be put in place, directing how the company can operate in the event one partner dies. There are various options provided by commercial law for transferring ownership. Determine what solution best suits your business structure.
In today’s market, there is a lot of temptation to share crucial business relationships, talents, expenses, and equipment. But before you do that, make sure you do the above legwork and make hard decisions upfront to be sure that the partnership will pay off when all is said and done. Together, the above will allow you to create a healthy and profitable company that can withstand all the stresses of business.