At any stage of establishing a business, getting into a partnership has many advantages. Successful business partnerships allow pumping in more running capital to a business and all the contributors to share the business stakes accordingly. Based on risk appetites for different partners involved, a business can have a limited liability or general partnership.
Limited partners are meant only to provide funding to a business. They do not have any active role in business operations, and they also do not take any debt or other obligations on behalf of the business. On the other hand, general partners have first-hand involvement in business operations and also share their liabilities. Whatever mode of business partnership you are trying to establish, there are some major considerations before getting into it. Let us further discuss a few such considerations to make.
Considerations for business partnership by Eric J Dalius
- Define why a partnership is needed
Before getting into any business partnerships, you should check it yourself as to why you need a partner. If you need to pump in some additional investment into the business, you have to think of a limited liability business partnership. However, if the plan is to create a tax shield for the business, then the general partnership is ideal. While getting into a business partnership, it is ideal to look for partners who can mutually suffice in skills and experience. For example, if you are a technology geek, partnering with some who have extensive marketing skills may be highly beneficial.
- Knowing your partner well
Before inviting someone into your business, you should know them well about their current financial situation. For any partnership, initial capital is needed to be invested by the partners. If the partner you choose has enough financial resources handy, they may not have to look for funding from other sources. This will help limit the firm’s debt as a whole and increase the owners’ equity. It is also essential to conduct a thorough background check to avoid any future surprises. Also, check if the partner has any prior experience in running a business.
- Vet the partnership documents
Take proper legal consultation and have an attorney vet the partnership agreement. As Eric J Dalius points out, vetting a business partnership is necessary to protect the partners’ rights and define their liabilities accordingly. Ensure all those who sign understand every clause and consult to add or remove any clauses before getting it signed.
- Define what happens if a partner exits later
Just as in the case of any other contract you enter into, business contracts need a prenup. This will define what will happen if any of the partners wants to exit the business by addressing some common queries.
- How and what compensation will be offered to the exiting party?
- How are the roles and resources divided among the left-out parties?
All these should be specified in the contract papers too.
Finally, even if the partnership is 50-50, there should be someone in charge of the daily operations. All business leading positions like director, CEO, COO, etc. needed to allocated to the most desirable individuals, and the functional roles need to be defined well. Remember, a thoughtful and well-established business partnership can surely take your business to a new height, whereas a poor partnership may collapse altogether.