You can organize a partnership as a general partnership, limited partnership or limited liability partnership. However, you can also organize it as a C corporation or S corporation. Each form of business has its advantages and disadvantages in terms of liability, taxes and continuity.
Talk to an attorney or other experienced advisor to help determine which form of business is right for you and your partner. Even if you're starting a business with your best friend from kindergarten, you need to draw up legal documents regarding your business structure, capital contribution to the business, how decisions will be made and disputes resolved and what happens if one partner wants to leave the business.
Thinking through all the things that could go wrong and how you will handle them makes it easier to deal with any difficulties that do arise. In order for your partnership to work, both of you must feel comfortable openly sharing your opinions and hashing out any disagreements that arise.
Sweeping your concerns under the rug only leads to bitterness and resentment which can destroy your partnership—and your business. But unless you take the time to lay the foundation for a lasting business partnership, your new business may never get off the ground.
Why your next deal may be a partnership
Skip to main content. To ensure your business partnership stays on course, follow these tips. Share the same values. Choose a partner with complementary skills. If you are both already operating, the costs may not be as high as if you both needed to start out. Everyone has their own limit for tolerating risk.
Financial risk can be more stressful than physical risk because it affects much more than your own safety. You should discuss with your partner how much financial risk you both can tolerate, and set limits. An example of risk could be the method that you choose to finance your business.
Formally Structure Your Small Business
There is generally more risk involved with debt financing than with equity financing using loans to finance instead of issuing shares, venture capitalists, etc. You may not have much of a choice at first how you finance your business, but be sure all parties understand the risks, and how much each person is responsible for. The type of business you put together will also dictate the risk that you assume. Creating a limited liability company keeps owners from personal responsibility for the debts of a failed business.
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When you create your partnership, you should discuss the expectations for pay. Most businesses do not generate profit within the first year or even the second year. The number one reason new businesses fail is that they don't have enough cash to pay the business' and owner's bills. Ensure you and your business partner know how you are going to make ends meet. Generally, in a partnership, the assets belong to the business unless specified in the partnership agreement. Partners will then own a percentage of the value of the company property based on the agreement.
This is usually only a concern for businesses when they are closing out, and owners are working through who gets what. Partnerships dissolve for many reasons. One partner may decide the partnership is no longer beneficial. You should include buy-out terms in case one partner wants to leave.
You might consider adding a dissolution clause to the partnership agreement. If the partnership is not working out, it would be beneficial to have pre-agreed upon terms for splitting things up.
An exit strategy is a plan if both partners should want out. This is can be accomplished by selling the company, or by selling all the inventory, assets, and interests a business has. A strong business partnership is built on open communication. Meet on a regular basis so you can share grievances, review roles, provide constructive criticism, and discuss future plans for the growth or direction of your business. Your business may grow over time as you and your partner work together. You may want to readdress your partnership agreement as your business grows.
You may need to add more partners, include senior employees, and include expansion agreements. You could include this in your initial agreement, but it might be better to wait until you are in a position to consider growth and expansion.
Partnering - Ipsen Corporate
It is simple to set up a partnership because there are no legal documents to file. A written agreement, signed by all partners, is a legal document recognized by law. Partnerships are often an oral agreement between two or more parties. Oral agreements can present problems in case of disagreements, even though they are legally binding. Instead, avoid potential problems by drawing up a partnership agreement.
According to the Small Business Administration SBA , your partnership agreement should include the following at a minimum :.