Starting a new business can be scary. So much to do. The risk of failure. The financial toll. As such, many people look to forming a partnership rather than chancing it all alone. After all, two (or more) heads are better than one, right? More people to invest. More people to do the work. More people to give ideas and share the risk.
Starting a business with a partner, in many places, is legally no different than starting one on your own. There are usually no additional licenses or permits required, no special tax considerations, and you don’t need to incorporate. That said, every country sets their own rules, so be sure and check the specific requirements for your location.
A partnership can make it easier, but it can also make it infinitely worse if you go in unprepared.
Consider Going It Alone
First of all, do you really need a partner? Why? If it’s some shortcoming in your skill or knowledge set, consider gaining it yourself. Partnerships can be tricky, so only go into one for the right reasons. Perhaps you could simply hire someone to fill a need, rather than entering into a formal partnership with them.
Know Your Partner(s)
Before entering into business with someone, take the time to get to know them (if you don’t already). Have some very frank and honest conversations about goals, objectives, business style, ethics, and so on. You want to agree on most things here. You know that advice that says to never loan money to friends or family? Well, the same could be true of going into business together. Many people believe that a strong existing relationship automatically equates to a strong business one, but the opposite is just as often true. Many friendships don’t survive.
The Partnership Agreement
This. Is. Crucial. Far too many people forgot this most important of steps because they feel they don’t need one (especially if the partners are close friends or family), or they have established a loose and informal, often verbal, agreement. Bad idea. You absolutely, 100% need a formal, written partnership agreement. And it should be drafted by someone with experience in that area (lawyer, accountant).
Your agreement needs to EXPLICITLY state everything about the partnership, including:
- Ownership Stake - how much does each partner own of the new business? A 50/50 split seems to make sense, but it is generally a good idea to have one partner with a bigger portion, even if only for decision purposes. Consider a 60/40 split based on initial investment.
- Profit and Loss Distribution - how is the profit divided? Who’s responsible for losses, and at what ratio?
- Dispute Resolution - what happens when there is disagreement? Who ultimately makes the call? Who could act as mediator?
- Compensation - how much salary does each partner receive?
- Roles, Responsibilities, and Titles - what does each partner actually do in the company hierarchy? What is his/her title? Who is responsible for what? This section needs to be detailed, specific, and lengthy.
- Goals and Objectives
- Exit Strategy - Many people forget this part. How can a partner exit the business? Are the other partners obligated to buy them out?
Decide on the Type of Partnership
There are actually 2-3 different types of partnership. A general partnership is the most common and easiest to set up. Everyone is equal (or relatively speaking, at any rate) and actively involved in the business. There is no special registration required in most places, and taxes are filed only by the individual partners, not the business itself. Partners have unlimited liability. A limited partnership is one in which one partner is “limited” in their liability to the amount of their investment (often referred to as a silent partner). A Limited Liability Partnership (LLP) is a business that includes both general and limited partners. A LLP may require special permits and registrations depending on where you live.
A general partnership is easiest to get going, but do remember that all partners have unlimited liability. There is no legal distinction between them and the business.
Other Useful Links
If you’ve considered all options, had “the talk” with your potential partners, carefully chosen your partnership type, and have had a professional draft your partnership agreement (and everyone has agreed and signed it), your partnership is a go. Two heads are indeed better than one, but when it comes to business, just make sure you know exactly what each head is thinking.