Entering into a business partnership has its advantages. It allows all contributors to share shares in the business. Depending on the willingness of the partners to take risks, the business may have a general or limited partnership. Limited partners are only there to provide funds to the business. They have no say in business operations, nor do they share responsibility for any debts or other business obligations. General partners run the business and also share in its liabilities. Since limited liability companies require a lot of paperwork, people usually tend to form public partnerships in businesses.
Things to consider before starting a business partnership
Business partnerships are a great way to share profits and losses with someone you can trust. However, a poorly executed partnership can prove to be a disaster for a business. Here are some helpful ways to protect your interests when creating a new business partnership:
1. Be sure of why you need a partner
Before entering into a business partnership with someone, you need to ask yourself why you need a partner. If you are only looking for an investor, then a limited liability company should be enough for you. However, if you are trying to create a tax shield for your businessflas, a general trading company would be a better choice.
Business partners should complement each other with experience and skills. If you are a technology enthusiast, connecting with a professional with extensive marketing experience can be quite beneficial, or going with a northern strategy.
2. Understanding your partner’s current financial situation
Before you ask someone to commit to your business, you need to understand their financial situation. A certain amount of seed capital may be required when starting a business. If business partners have sufficient financial resources, they will not require financing from other sources. This will reduce the firm’s debt and increase its equity.
3. Background check
Even if you trust someone to be your business partner, it doesn’t hurt to do some background checks. Calling a few professional and personal references can give you a good idea of their work ethic. A background check will help you avoid future surprises when you start working with your business partner. If your business partner is used to staying up late and you are not, you can divide the responsibilities accordingly.
It’s a good idea to check if your partner has any previous experience running a new business venture. This will tell you how they performed in their previous endeavors.
4. Have a lawyer review the partnership documents
Make sure you have a legal opinion before signing any partnership agreement. It is one of the most useful ways to protect your rights and interests in a business partnership. It is important to have a good understanding of each clause, as a poorly written agreement can get you into liability trouble.
Before entering into a partnership, you should ensure that you have added or removed any relevant clause. This is because it is cumbersome to make changes once the agreement is signed.Read informative trends at starpod.
5. The partnership should be based solely on business terms
Business partnerships should not be based on personal relationships or preferences. Strict performance monitoring measures should be in place from day one. Accountabilities should be clearly defined and performance metrics should show each individual’s contribution to the business.
Weak accountability and a performance measurement system is one of the reasons many partnerships fail. Rather than putting forth their efforts, the owners begin to blame each other for wrong decisions which lead to losses for the company.
6. The level of commitment of your business partner
All partnerships begin amicably and with great enthusiasm. However, some people lose their excitement along the way due to the daily drudgery. Therefore, you need to understand your partner’s level of commitment before entering into a business partnership.
Your business partners should be able to demonstrate the same level of commitment at every stage of the business. If they don’t stay committed to the business, it will reflect in their work and it can also be detrimental to the business. The best way to maintain the level of commitment of each business partner is to set the desired expectations of each person from day one.
When concluding a partnership agreement, you must have an idea of the other obligations of your partner. Responsibilities such as caring for an elderly parent should be properly thought through to set realistic expectations. This gives room for compassion and flexibility in your work ethic.
7. What happens when a partner leaves the business
Like any other contract, a business venture requires a prenup. This would outline what happens if a partner wishes to close the business. Some of the questions that need to be answered in such a scenario include:
How will the departing party receive compensation?
How will resources be distributed among the remaining trading partners?
And how will you divide the responsibilities?
8. Who will be in charge of day-to-day operations
Even if there is a 50/50 partnership, someone has to be in charge of the day-to-day operations. Positions including CEO and Director must be allocated to appropriate individuals including business partners from the outset.
This helps in creating an organizational structure and further defining the roles and responsibilities of each stakeholder. When each individual knows what is expected of them, they are more likely to perform better in their role.
9. You share the same values and vision
Entering into a business partnership with someone who shares the same values and vision greatly simplifies day-to-day operations. You can quickly make important business decisions and define long-term strategies. Sometimes, however, even the most like-minded individuals can disagree on important decisions. In such cases, it is essential to keep the long-term goals of the business in mind.
Business partnerships are a great way to share liabilities and raise funding when starting a new business. For a business partnership to be successful, it is important to find a partner who will help you make fruitful business decisions. Therefore, pay attention to the above integral aspects as a weak partner(s) can prove detrimental to your new venture.