Here are some common questions that come up when working with business owners who are looking to get started - should I find a business partner, if so who should it be and where should I look for them? Many successful businesses start as great partnerships. But, how do you wisely discern what makes for a great business partner?
In terms of answering the question “who should I go into business with?” there are a couple of upfront considerations to think about. Starting a business can be nerve wracking, make sure to think a few things over first. Carefully analyze the business you’re looking to get into, what skills you have and what skills/needs you may not have or be able to fill and realistically how well do you work with other people. The answer may be that you shouldn’t go into business with anyone, and you’re better off going it solo, outsourcing where you need help or bringing in employees.
Let’s assume the decision has been made, and going into business with a partner or partners is the best move. There are some things to consider as you move forward and start launching your new company as a business partnership. It goes without saying you should choose your partners wisely, whether they be friends, family or an acquaintance. It will be important to get some paperwork done sooner rather than later, with an eye towards what will happen when one of your partners (or you) wants out of the relationship - a business divorce as it were. It will be better to plan for such situations when everyone is on good terms, working together well and not bickering; it’s been said that a partnership breaking up can make the worst divorce case look like a cakewalk. Take steps early on to avoid that at all costs.
Here are some questions to ask, and issues to consider, when going into a business partnership:
What’s the best business entity for your partnership?
What type of business entity will be best for your business; a general partnership, an LLC, a corporation? Some of that depends on what type of business you’re starting and what you’ll need to accomplish. There are also some tax considerations to consider and explore when making that decision. Don’t overlook the corporate setup of the different entities; corporations require boards and officers, while LLC’s have less formalities and still offer limited personal liability. General partnerships will probably expose the partners to personal liability, which may not be a good move for anyone. Consider the options available and the specifics of the business you’re looking to start and choose the best entity.
What will the percentage of ownership be?
You’ll need to know who will own what percentage of the company. Are you all equal owners in the business? Along those same lines, what will each of you contribute to the company to get it up and running? It doesn’t have to be money, it could be anything that you as partners agree on - some other resource or access to a network of potential clients or time and energy. Make sure to document both the ownership percentage and initial expected contribution of all the partners.
How will you allocate profits and losses?
You’ll need to decide how profits and losses will be allocated to the partners. Will it be in proportion to your ownership interests? That’s the standard way it works, unless you’re looking for a special allocation, in which case you’ll need to comply with the necessary IRS regulations. What about draws and distributions? When will you be allowed to take money out of the business? How will you get paid? Like many other questions here, there isn’t necessarily a right or wrong answer to these questions, the important thing is to think about them upfront and address them so you can avoid the pitfalls that could come down the road.
How will you handle corporate governance?
Basically, how will decisions be made. Companies have to make a lot of decisions as the business gets started and as it starts to grow. This is probably something that will be on the top of everyone’s mind as the process of getting started is mapped out. You could have different partners handle different aspects of the business: one is responsible for sales; one is responsible for human resources, and so on. Another option, and probably the more common when getting started out, is that you all have a say in everything. There is no right or wrong way to decide how this will be handled, the key is to think it through beforehand.
How will you handle a situation where you disagree?
If you’ve got partners and all have an equal say in the operations of the business, you’re undoubtedly going to run into a situation where you disagree on a decision. If there are two of you in the partnership you run the risk of a stalemate, where you simply disagree on what the best decision for the company is. Consider the options on how this will be handled; will the status quo just remain in such situations, will you bring in a neutral 3rd party to be the tie breaker, making the best decision for the business without some of the emotion you bring to the table? There’s no right or wrong here either, but it’s something that should be addressed early on to avoid conflicts down the road.
How will you handle the resignation or death of a partner?
What will happen when a partner just decides they want out of the business, for whatever reason? There needs to be a mechanism in place to address that situation, how they will be bought out and how the price of their interest will be determined. What about a situation where a partner dies, how will the business handle that. If not addressed properly you could end up in business with your partner's spouse or heirs. Consider a buy/sell agreement which will allow for a method by which a partnership interest can be valued and the terms under which it can be purchased.
Non-Competes, Trade Secrets and Intellectual Property
When a partner leaves or is terminated from the company, are they going to be allowed to go out and compete with the business? How will you protect company trade secrets and intellectual property when a partner leaves? Those are valuable business assets. A lot, or all of this comes under contract law, and can be addressed in the governing documents of the company.
Thinking through some of these questions to ask when going into a business partnership and potential issues beforehand will go a long way in preventing disputes and helping the company run as smoothly as possible. The bottom line is you should go into business with someone who shares the same vision for the company and who will work with you upfront to address a lot of the questions here. That could be a family member, a friend or an acquaintance, but don’t just jump into business with partners without hashing out some of the questions and details about how things will work in advance. If you can’t get on the same page about some of this, that's a good sign that the partnership may not be a good idea.
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