In 2015, only 8% of businesses were partnerships in the US, and 7 out of 10 of these business partnerships failed. Yet many business partners make the same avoidable mistakes over and over again. An unbalanced business partnership can ultimately lead to the end of your company.
This guide will help you become a better business partner, but also give you a handy checklist for choosing the right person or organization to partner with your business.
Why Would I Consider Going Into A Business Partnership?
When the economy is turbulent, entering into a business partnership can help share risk and drive investment into your business. Entering into a business partnership with one or more individuals, or another company, can bring key skills into your organization. You or your partner might bring a wealth of experience or knowledge of a specific sector or customer base. The aim of a business partnership is to bring together core strengths that can ultimately make your business a success. You should consider going into a business partnership if you and the other partner share the same vision and goals for the business. You should both be clear on what direction you want to take the business, and have a shared vision, strategy and five-year plan in place.
What Types Of Business Partnerships Are There?
There are a number of business partnerships out there that can help protect all individuals involved in a business partnership.
Limited Liability Partnerships (LLPs) – Limited Liability Partnerships are when the business partners can both be involved in the management of the business. However, each individual is responsible for their own actions. Under the law, ‘limited liability’ means that if the individual partner were to be sued, the claimant can only sue for a fixed amount of money. This is usually limited to the partner’s original investment in the company. If you are a business partnership that requires limited liability, then a limited liability partnership package can help you.
General partnerships – these are business partnerships where each general partner involved takes an active role in the business. They will be responsible for the day-to-day running and operations of the company. If you go into a business partnership without any specific requirements laid out, under the law it will likely be considered a general partnership.
Limited partnerships – these partners do not take an active role in the business but will contribute financial value of some kind. You may recognize the term ‘silent partner’, which also describes a limited partner. They generally contribute a fixed amount to the business while the general partner runs the daily operations.
A partnership can be made up of limited partnerships and general partnerships. If the partnership involved is between two businesses you will hear this referred to as a joint venture, and instead of an LLP the partnership will be referred to as an LLC.
What Are The Red Flags To Look For When Becoming A Business Partner?
As a small business, you need to frequently adapt to changes and difficulties, and having a business partner that shares your values will ensure you can navigate difficult waters together. Here are some of the standard mistakes you can make when becoming or choosing a business partner.
- Working with family or friends – we’re not saying that family businesses are a bad idea, but working with family or friends is risky. What if you fall out or break up? Try and assess your potential business partner in an objective way when they are a family member or friend. Are they invested in the business? Do they share your goals? No matter how bad it is saying no to a relative or friend, it’s ultimately better than working with them if you aren’t aligned.
- Choosing a partner that’s not invested – when choosing a business partner, you need to be sure that they will put the work in. If they are a silent partner, expectations may be that they’ll invest money and then step back, which is fine. But if you are entering into a limited or general partnership, then you need to be certain that you are working with someone that can share the day-to-day management of the company. The same goes for those that don’t understand your business – you need someone invested in the clients, company and where it is going in the future.
- When you’re not on the same page – you want to take the company in direction A, but your partner is thinking path B. If you aren’t both agreed in what direction the company should go, then you should not enter into a partnership. Have this conversation way before anything is signed or launched. You don’t want to get five years into the business and work out that you’re not aligned on the five-year plan.
- Choosing someone with the wrong skills – everyone has their skillset, but you want to be sure that you and your partner have an equal distribution of skills. It’s great if one of your core skills is marketing. But if neither you nor your partner knows anything about the sector you’re going into, then your skills aren’t right for the job. Seek out individuals or organizations that can enhance your business, rather than just inject an initial investment.
- Working with someone you don’t get on with – the skills, motivation and investments might be equal, but if you don’t get on, the partnership won’t work. Your business is going to have ups and downs, and you need to be able to work with someone during difficult times. If you fundamentally don’t get on, no amount of money or motivation can overcome this simple flaw in the business plan.
Frequently Asked Questions
How Many Business Partners Can I Have?
You must have a minimum of two business partners, although a dormant company can also technically be considered a partner. If one partner steps down from the business for six months or more, then the other partner becomes fully liable for the business. You can also have more than two partners in a business.
Can My Business Partnership Be For A Charity?
Yes, your business partnership can be for a non-profit, charity organization of any size. Your business partner can be a charity, or the business itself can be a non-profit.
Is It Better To Go Into Business Alone?
If you can’t find a business partner to go into business with, you might consider starting your business alone. While you take on more risk, you also have more flexibility as well. It just depends what initial cash injection you need to make the business successful, and whether you can take on the risks and costs on your own.
I Am Not Getting On With My Business Partner. What Do I Do?
If you cannot reconcile with your business partner, you may need to consider a change in business status. You could buy out your partner, sell to them, or sell the whole business. The situation depends on the type of business you have and whether one of you can take on the risk and costs of the business on your own.
How Can I Set Up The Legal Side Of My Partnership?
There are many companies out there that offer partnership packages to help individuals and businesses set up their company structure. Most of these services offer registration of your business to the relevant authority for you. They also provide legal documents for you and your partner(s) to sign.
Can You Have A 60-40 Business Partnership?
You can technically have any form of split in a business partnership. A legal adviser will provide the documentation for you depending on the type of partnership you are starting up and how many partners are involved in the business.
What Can I Do As A Limited Partner?
As a limited, or silent partner, you can still have different levels of responsibility for the business. While you may have little to no involvement in the company’s daily running, if you have limited liability, you are still responsible up to the sum of your original investment capital. However, you have no management responsibility, and if the company profits, you do too.
I Don’t Want To Be A Business Partner Anymore. What Do I Do?
You might have a great relationship with your business partner, but no longer want to be involved in the running of the company. If this is the case, you can sell your side of the partnership to your partner, sell the company, or bring on a new partner and step down.
There are many benefits to being a business partner, from sharing risk to having another person or business add their financial and skill investment to a company. There are some risks to consider, like making sure it’s a good fit in terms of personality and values. Keeping it professional will help, even if you are considering working with a family member. Ultimately, having a business partner can help your organization get the knowledge and funding it needs to grow.
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