Starting a business with a partner can be a great way to combine strengths, resources, and ideas. But just like any marriage, a partnership can also come with its own set of challenges and issues. It’s important to be aware of these potential roadblocks and know how to address them before they escalate into bigger problems.
Legally, a partnership has five elements: (1) There must be an agreement; (2) between two or more persons; (3) who agree to carry on a business; (4) with the object of sharing profits; and (5) the business must be carried on by all or any of them acting for all. Think of a partnership as a “business marriage” – it requires a commitment from both parties to work together towards a common goal.
Types of Partnerships
Here are some of the most common partnership structures:
- General Partnership (GP): A GP is a simple type of partnership in which all partners have unlimited personal liability for the partnership’s debts and obligations.
- Limited Partnership (LP): An LP is a type of partnership that has one or more general partners who have unlimited personal liability and one or more limited partners who only have limited liability.
- Limited Liability Partnership (LLP): An LLP is a type of partnership in which all partners have limited liability for the partnership’s debts and obligations.
- Limited Liability Limited Partnership (LLLP): An LLLP is a type of partnership that combines the features of a limited partnership and a limited liability partnership.
- Limited Liability Company (LLC): An LLC is a hybrid business structure that provides the personal liability protection of a corporation and the tax benefits of a partnership.
- Corporation (usually S-Corp): A corporation is a separate legal entity from its owners, which means that the owners have limited liability for the corporation’s debts and obligations.
- Strategic Partnership: A strategic partnership is a type of partnership in which two or more companies collaborate to achieve a common goal or to achieve mutual benefits.
- Joint Venture: A joint venture is a type of partnership in which two or more companies come together to undertake a specific project or to start a new business.
It’s important to choose the right partnership structure for your business based on your goals, resources, and the legal and tax requirements of your jurisdiction.
Good and Bad Elements of a Partnership
Partnerships can be a great way to grow your business, but not all partnerships are created equal. To increase your chances of success, it’s important to consider the following elements of a successful partnership:
- Trust: Trust is the foundation of any partnership. Partners need to trust each other to work together effectively.
- Communication: Good communication is essential in a partnership. Partners should be open, honest, and direct in their communication to avoid misunderstandings and resolve conflicts quickly.
- Proper Business Planning: A well-thought-out business plan is essential for a successful partnership. This includes upfront knowledge of costs and target market, as well as a strong understanding of each partner’s exit strategy.
- Clarity of Purpose and Responsibilities: Partners should have a clear understanding of their roles and responsibilities in the partnership. This helps to ensure that everyone is working towards the same goal.
- Expectations Management: Managing expectations is key to a successful partnership. Partners should have a clear understanding of what each expects from the partnership and what the partnership can realistically achieve.
- Profitability Is Not the Only Indicator of Success: Just because a partnership is profitable doesn’t mean it is successful. A successful partnership involves much more than just making money.
- Equality of Effort Is Not Required: Partners don’t have to contribute equally in terms of effort or resources to the partnership. What’s important is that each partner is fulfilling their responsibilities and contributing to the partnership’s success.
By considering these elements of a successful partnership, you can increase your chances of forming a partnership that is long-lasting and fulfilling.
With this in mind, let’s explore some of the common partnership issues that new businesses may face:
- Unequal Contributions: One partner may feel like they are doing more work or contributing more to the business than the other. This can lead to feelings of resentment and a breakdown in the partnership.
- Differences in Vision: Partners may have different ideas about the direction and goals of the business, leading to disagreements and conflict.
- Lack of Communication: Partners may not be communicating effectively, leading to misunderstandings and missed opportunities.
- Financial Mismanagement: Partners may not be on the same page when it comes to financial decisions, leading to disagreements and potentially putting the business at risk.
- Personal Issues: Personal issues, such as stress or health problems, can impact a partner’s ability to contribute to the business and cause strain on the partnership.
It’s important for partners to have open and honest communication about these potential issues before they arise. It’s also a good idea to have a written agreement in place that outlines each partner’s responsibilities and expectations, and a plan for resolving conflicts if they arise.
One of the most important elements of a successful partnership is having a clear understanding of each partner’s exit strategy. This is the plan for how each partner will eventually leave the partnership, either voluntarily or involuntarily. The following are some common exit strategies:
- Passing on to the Next Generation: This exit strategy involves passing the ownership and management of the partnership to the next generation of family members.
- Sale to Another Partner: In this exit strategy, one partner sells their share of the partnership to another partner, usually after a triggering event, such as reaching a certain revenue or after a certain amount of time has passed.
- Sale to Private Equity: In this exit strategy, the partnership is sold to a private equity firm.
- Sale to a Competitor: In this exit strategy, the partnership is sold to a competitor in the same industry.
- Initial Public Offering (IPO): An IPO is the process of taking a company public and offering its shares to the general public. This exit strategy can be used by a partnership to raise capital and provide liquidity for its partners.
It’s important for each partner to be upfront about their exit strategy and for the partnership agreement to reflect these strategies. This helps to ensure that the partnership is structured in a way that supports each partner’s goals and reduces the likelihood of conflict or misunderstandings in the future.
Establishing a Successful Partnership: Steps to Follow
Starting a partnership can be a complex and challenging process, but with the right preparation and approach, you can increase the chances of success. Here are five steps to follow:
- Do Your Due Diligence: Before entering into a partnership, it’s important to do your due diligence on the potential partner(s). This includes reviewing their business history, financials, and reputation.
- Obtain the Intentions of Each Partner: To avoid misunderstandings and conflicts, it’s important to obtain the intentions of each partner before entering into a partnership. This can be done through a partnership questionnaire, which should cover each partner’s goals, expectations, and desired outcomes.
- Obtain Consensus on Conflict Points: Before entering into a partnership, it’s important to identify and resolve any potential conflict points. This requires open and honest communication between the partners and a willingness to find mutually acceptable solutions.
- Draft and Negotiate the Partnership Agreement: Once you have identified the intentions of each partner and resolved any conflict points, it’s time to draft and negotiate the partnership agreement. This agreement should clearly outline the terms of the partnership, including the division of responsibilities, profits, and any exit strategies.
- Execution: The final step is to execute the partnership agreement, which typically involves signing the agreement and putting it into effect. It’s important to monitor the partnership regularly and make any necessary changes to the agreement over time to ensure its continued success.
Key Components of a Partnership Agreement
A partnership agreement is a critical document that outlines the terms and conditions of a partnership. It’s essential to cover all the key elements of a partnership agreement to ensure the success of the partnership. Here are some of the key components to include:
- Defining the Business Model: The partnership agreement should clearly outline the business model and the products or services that the partnership will provide.
- Fundraising Strategy: If start-up capital is required, the partnership agreement should include a fundraising strategy that outlines how funds will be raised and how they will be used.
- Partner Responsibilities: The partnership agreement should clearly define the responsibilities of each partner, including the expectations of their daily involvement in the business.
- Percentage Ownership: The partnership agreement should specify the percentage ownership of each partner and how ownership will change over time.
- Dissolution Protocol: In the event that partners can’t agree, the partnership agreement should include a dissolution protocol that outlines the steps to be taken when the partnership is dissolved.
- Contributions of Value: The partnership agreement should specify the contributions of value that each partner will make, including money, time, and technology.
- Allocations of Profits and Losses: The partnership agreement should outline the allocation of profits and losses, including how profits and losses will be distributed among the partners.
- Decision-Making Guidelines: The partnership agreement should include guidelines for making decisions, including how decisions will be made and how disputes will be resolved.
- Contingencies for Death and Withdrawal: The partnership agreement should include contingencies for death and withdrawal, including how partners will be replaced and how the business will continue in the absence of a partner.
- Intellectual Property Allocation: The partnership agreement should specify the allocation of intellectual property rights and how they will be protected and managed.
- Valuation Protocol: The partnership agreement should include a strong valuation protocol that outlines how the value of the partnership will be determined.
- Dispute Resolution Protocol: The partnership agreement should include a notice to cure and alternative dispute resolution protocol that outlines the steps to be taken if a dispute arises.
By covering all of these key components in the partnership agreement, you can ensure the success and stability of the partnership for years to come.
In conclusion, forming a partnership is a serious decision that requires careful consideration and planning. A successful partnership requires trust, clear communication, proper business planning, and a mutual understanding of each partner’s responsibilities, strengths and weaknesses, and exit strategies. To ensure the longevity and success of the partnership, it is important to thoroughly research potential partners and establish a comprehensive partnership agreement that outlines all essential elements including responsibilities, decision-making processes, intellectual property allocation, and alternative dispute resolution protocols. Remember, partnerships can be complex but with the right steps in place, they can lead to business growth and success.