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9 Things to Consider Before Forming a Business Partnership
Entering into a business partnership has its advantages. This allows all contributors to share a stake in the business. Depending on the risk appetite of the partners, the business may have a general or limited liability partnership. Limited partners are only there to provide funds to the business. They have no say in the running of the business, nor do they share responsibility for any debts or other business obligations. General partners run the business and also share its liabilities. Since limited liability partnerships require a lot of paperwork, people usually form general partnerships in businesses.
Things to Consider Before Setting Up a Business Partnership
Business partnerships are a great way to share your profits and losses with someone you can trust. However, a poorly executed partnership can be a disaster for a business. Here are some helpful ways to protect your interests when forming a new business partnership:
1. Being clear about why you want a partner
Before entering into a business partnership with someone, you should ask yourself why you need a partner. If you are looking for just one investor, then a limited liability partnership should suffice. However, if you are trying to create a tax shield for your business, a general partnership would be a better option.
Business partners should complement each other in terms of experience and skills. If you are a technology enthusiast, teaming up with a professional with extensive marketing experience can be very beneficial.
2. Understanding your partner’s current financial situation
Before asking someone to commit to your business, you need to understand their financial situation. When starting a business, there may be some initial capital required. If business partners have sufficient financial resources, they do not need funds from other sources. This will reduce the firm’s debt and increase owner’s equity.
3. Background check
If you trust someone to be your business partner, there’s no harm in doing a background check. Calling some professional and personal references can give you a fair idea of their work ethic. Background checks help you avoid any future surprises when you start working with your business partner. If your business partner has a habit of staying late and you don’t, you can divide the responsibilities accordingly.
It’s a good idea to check if your partner has any prior experience running a new business. This will tell you how they performed in their previous attempts.
4. Have an attorney check the partnership documents
Make sure to get a legal opinion before signing any partnership agreement. This is the most useful way to protect your rights and interests in a business partnership. Having a good understanding of each clause is important, as a poorly written contract can run you into liability issues.
You must ensure that any relevant section is added or deleted before entering into the partnership. Because it is difficult to amend the contract once it is signed.
5. Partnership should be based on business terms only
Business partnerships should not be based on personal relationships or preferences. Strong accountability measures should be in place from day one to track performance. Responsibilities should be clearly defined and performance metrics should indicate each person’s contribution to the business.
Poor accountability and performance measurement systems are one of the reasons many partnerships fail. Instead of putting in their efforts, the owners start blaming each other for the wrong decisions and the resulting company losses.
6. Commitment level of your business partner
All partnerships begin on friendly terms and with great enthusiasm. However, some people lose enthusiasm along the way due to the daily slog. Therefore, you need to understand your partner’s commitment level before entering into a business partnership.
Your business partner(s) should be able to show the same level of commitment at every stage of the business. If they are not committed to the business, it will reflect in their work and may even be detrimental to the business. The best way to maintain the commitment level of each business partner is to set expectations from each person from day one.
When entering into a partnership agreement, you need to have an idea about the additional responsibilities of your partner. Responsibilities such as caring for elderly parents should be given due thought to set realistic expectations. This allows room for kindness and flexibility in your work ethic.
7. What happens if a partner leaves the business
Like any other contract, a business venture requires a prenup. It outlines what happens if a partner wants to exit the business. Some questions to answer in such a scenario include:
How will the exiting party get compensation?
How will resources be divided among the remaining trading partners?
Also, how do you share responsibilities?
8. Who will be in charge of day to day operations
Even with a 50-50 partnership, someone needs to be in charge of day-to-day operations. Positions including CEO and director need to be allocated to appropriate people, including business partners, from the outset.
It helps to create an organizational structure and further define the roles and responsibilities of each stakeholder. When each person knows what is expected of them, they are more likely to perform better in their roles.
9. You share the same values and vision
Entering into a business partnership with someone who shares similar values and vision makes day-to-day operations much easier. You can make important business decisions quickly and define long-term strategies. However, sometimes, even the most like-minded people can disagree on important decisions. In such cases, it is necessary to keep the long-term goals of the business in mind.
The bottom line
Business partnerships are a great way to share responsibilities and raise funds while establishing a new business. For a business partnership to be successful, it is important to find a partner who will help you make fruitful decisions for the business. Hence, pay attention to the above mentioned integral aspects, as weak partner(s) may prove detrimental to your new venture.
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