If you’re thinking about starting up a business partnership, these are 5 things you must know before starting that partnership to make sure your relationship is smooth sailing.
Going into business with a friend sounds like fun, right?
No more sitting around in your sweatpants until noon by yourself…. now you can do that with a friend ; )
As my Mom would say, “many hands make light work.” But many hands also bring a few unique issues you need to know about before going into business with them.
Maybe you want to go into business with someone so you can combine your experiences and perspectives. Maybe you can’t do it alone because you need her expertise.
Those are all good reasons to go into a business partnership with someone.
And so many of these relationships go so well. But not all do.
Before we get started, let me explain what a partnership is.
A “partnership” is actually a business entity type. It’s something you and your business partner register as in 1 of the states where you live. (other business entities = LLC, sole proprietor, etc.)
A partnership doesn’t have to be 50/50 either (actually, most attorneys recommend never splitting 50/50. Someone needs to be able to pull the trigger.)
People in partnerships can split responsibilities, too. One person could contribute more money than time and vice versa.
One person could be the financial/business person and the other could be more creative and into marketing.
All of this stuff is formally written up (and signed) between partners in a partnership in, you guessed it, a partnership agreement.
But we’re not just worried about a ‘formal’ or registered business partnership here.
You also want to be careful not to enter into a loosy-goosey business partnership, too.
You never know when a business is going to take off (or fail, unfortunately) — and you probably want something more official in writing to protect you and your business if things go south.
When I worked as a corporate attorney at a law firm, most of the cases I handled were between business partners who started out as friends.
People are always surprised (and saddened) to hear that, but I actually think it makes perfect sense. We used to call them “business divorces” because after working side-by-side, day-after-day on a business together, they had the same type of bitterness, anger, and resentment that marital divorces have.
This is one of those cases where you plan for the worst and hope for the best.
And I know what you’re thinking….
“Me and my partner are solid. This would never happen to us!”
I know, I get it! The point is – you don’t ever think this will happen to you and your partner when things are good.
The point is that unexpected things can come up. Stuff you can’t think of right now. And that’s the stuff we’re planning for.
Here are 5 things you must know before starting a business partnership:
1. Aligned Business Vision
Before formalizing your partnership and starting a business together, make sure you’re on the same page in terms of what services/products you’ll offer, the company’s core values, branding, marketing, and where you see the company heading in 1, 3 and 5 years.
2. Sign a Business Partnership Agreement
By signing a written partnership (or operating) agreement, you’ll iron out issues that could arise down the line ahead of time. If a conflict comes up, it’s already addressed in your agreement. You’ll simply look back at your agreement and have clear cut direction.
3. Assign Responsibilities
Your partnership or operating agreement should address who’s handling what tasks and responsibilities. Be as clear, thorough, and descriptive as possible. Remember to keep this section of your agreement updated as your company continues to grow and evolve.
4. Business Partnership Equity
If you both invest an equal amount and agree to split the profits 50/50 but one of you has taken on a significantly bigger load of responsibilities, this may create some resentment down the line. Talk with your partner and make sure you’re both comfortable with your investment and equity percentages given your responsibility distribution.
5. Plan for “Worst Case Scenario”
Since we know that these relationships can unfortunately head south, plan for any potential problems by talking through the different scenarios (1 wants to leave and another stay, you both want to leave, etc.) and make sure each scenario is addressed in your agreement.
If someone leaves, what do they get paid? How will you divide what’s left? What happens to your clients or customer list?
Hopefully your business partnership is successful and peaceful. Even though we might not be able to see it now, we have to anticipate how things would be handled if our business partnership didn’t work out. In this case and so many others, a little bit of planning and preparation goes a long way.
Note: this is not legal advice. It’s simply legal information and education you and your business partner should consider, in addition to other tax, financial and legal issues. When creating a business partnership, I always suggest each hiring your own lawyer and hiring 1 mutual business attorney for the partnership.