How to Form a Successful Partnership

Sparks Law | June 29th, 2015

business partners make an agreementWhen forming a business, you have to decide what type of legal entity it’s going to be. Partnerships are common for small businesses because it’s easy to set up guidelines under which the business will operate. A partnership also ensures that business operators will not compete or interfere with one another’s business practices as each person has a stake in the overall success of the company.

For your partnership to run smoothly, you must take care of a few crucial items before opening your doors.

 

1. Choosing the Right People to Work With

When choosing whom to go into business with, you have to be extremely careful. Starting a business with friends or family members may seem like a good idea at the time, but throwing business into the mix can place major strains on relationships, even close ones.

You have to go in knowing that mistakes are bound to happen and blame will certainly be dealt out. Are your relationships with the people you’re partnering with strong enough to handle all that goes into running a business?

Going into business with like-minded people that share your aspirations will help a lot when making hard decisions. Everyone has to act as a united front. Having the combined support of your partners will see your business through good times and bad.

 

2. Drawing up a Partnership Agreement

Once the partners have been selected, there must be a clear understanding of each person’s role and who has the power to do what. All of this and more can be laid out in a Partnership Agreement. This is perhaps the single most important document your business will create while operating as a partnership, so it is important that you have it drafted by an attorney accustomed to dealing with small businesses.

A good Partnership Agreement should include the following:

  • The percentage of ownership
  • Allocation of profits and losses
  • Decisions that must have a consensus
  • Steps to follow if a partner dies or leave the partnership
  • A protocol for resolving disputes

And Partnership Agreements can be as detailed as you like—the important thing is that you have one and follow its requirements. For more on this, see our Corporate Minute post on Partnership Agreements.

 

3. Protect Yourself from Partnership Debts

This should also be outlined in the partnership agreement. Protecting yourself from partnership debts means limiting the amount of debt one partner can tie to the partnership without the consent of the remaining partners.

If debts are not limited, then any one partner can legally bind the partnership to a business agreement or debt, possibly putting the company in financial strain. Plus, if the partnership is unable to pay the debt, you and other partners can be held personally liable. The last thing you want is for a partner to go rogue and strap you and others with debt that was not agreed upon.

Once these three items have been dealt with, your business will have a solid foundation on which it can succeed. For more on partnerships see our Partnerships page and our post on When Partnerships Go Sour.

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