Small businesses are the backbone of the U.S. economy. They account for 65 percent of the new jobs created in this country, according to data from the federal Bureau of Labor Statistics. Of the different forms of business structures from which entrepreneurs may choose, business partnership is the second most popular behind sole proprietorships.
Partnerships are formed and governed by state law. They are generally defined as a business structure in which two or more people come together to run an enterprise for profit.
The reasons for the popularity of partnerships among business owners vary according to the individual needs and preferences of the people operating them. Four features of the partnership form of business that are frequently cited as the reason for choosing it are:
- Setting them up is easy and inexpensive;
- Having one or more partners increases access to sources of capital;
- The business benefits from the shared skills and expertise of more than one owner;
- Expanding the business with additional owners is relatively easy to accomplish.
Popularity, when it comes to a business structure, does not guarantee success. Making a partnership successful takes a lot of cooperation, planning and an understanding of the rules under which the business will operate. The process begins when two or more people decide to work together as partners.
While there is no way to predict whether your business relationship with your fellow owners will be a successful one, there are 17 things you can do to increase the chances that your partnership will survive:
#1. Get To Know Your Future Partner
If this is a new business venture, discuss your vision of the business with your prospective partner to make certain that the two of you agree. Nothing is worse than starting out in a business relationship with the partners having different views of where they want to take it.
Discussions about the direction in which an enterprise should be taken are also essential before inviting someone to join an existing business. Communication about your business plans should begin as soon as you and your prospective partner think you might be heading toward a partnership.
Formal and informal meetings will give you an opportunity to learn more about the person who might become your business partner. Depending upon the type of business you are opening or continuing, it pays to get to know the person with whom you might be spending 10 or more hours with each day.
#2. Search the Internet
Social media offers a wealth of information about people. Facebook, LinkedIn, Twitter and other sources are available to find out more information about your future partner.
If you discover that the person upon whom you will be depending to help run the business is a sports fan who posts about traveling the country to follow their favorite team, you might want to discuss this with your future partner.
#3. Check Your Partner’s References
Even if the person you are thinking of inviting into a partnership is someone you know socially, asking for work or business references is a good way to find what others have to say about the individual’s work ethic and skills.
You probably would not hire a new employee without checking references, so it makes sense to do the same thing for someone who will be making management decisions.
#4. Get To Know Your Partner’s Partner
Business relationships, particularly partnerships, are based on trust, mutual understanding and communication. If your prospective partner is married or in a relationship with someone, getting to know that person is a good idea.
Depending upon decisions you and your business partner make when preparing a partnership agreement – there will be more about that later – your partner’s spouse could be in business with you if your partner dies. Getting to know that person before the partnership agreement is drafted could cause you to rethink what you had in mind if a partner dies.
#5. Work Together Before Formalizing The Relationship
As was mentioned previously, business partners frequently spend more time with each other each workday than they do with their families. One of the best ways to find out if this is the person you want to be working with is to actually work together beforehand.
#6. Get Advice From Others
If you are inviting someone to join an existing business, find out what key employees think of the prospective partner. Finding out that a new owner does not get along with employees can spell disaster for a business.
Encourage workers to be honest with you about their opinion.
#7. Ask Others In Your Industry
Chances are that the person you are considering as a new partner already works in your industry. Ask other business owners for their opinion of the person.
This is not the same as checking the individual’s employment references. A person who does not have a good reputation in your industry will not help your business, and the likelihood is that the person’s reputation will hurt you.
#8. Take Your Time Making A Decision
Rushing into a new business relationship without doing your homework is the best way to open the door to disaster. Just because your future business partner is likable and says all of the right things, that may not make that person a good fit for your business.
Evaluate what the new partnership will offer to the growth and success of your business. If you cannot see the advantages now, you probably will not see them after you are in business together.
#9. Check If Your Partner Is Up-To-Date With Your Industry
Some industries change so rapidly that business practices that worked five years ago might put you out of business today. This is particularly true with businesses that must meet government regulatory standards.
Someone joining your business who has been away from your industry for a long time could offer challenges unless the person has stayed current with industry standards.
#10. Speak To Professionals Who Know Your Business
The accountant and attorney you use for your business should not be left out of the vetting process in selecting a business partner. They might be able to offer objective insight into whether you choice will be a good fit for your company.
#11. Create A Plan For Success
Once you make the decision to enter into a partnership, the next step should be creation of a partnership agreement. Written partnership agreements help to avoid conflicts by anticipating solutions to problems or situations that might arise in the future.
#12. Agree On Each Partner’s Percentage Of Ownership
Unless a partnership agreement says otherwise, ownership is divided equally among the partners in most states. If partners are not contributing equal amounts to starting the business, then this can be reflected in the partnership agreement.
#13. Specify The Distribution Of Profits And Losses
Partners divide profits and losses equally, but they may agree to a different distribution in the partnership agreement. The agreement may also stipulate whether partners may draw against profits prior to when they are normally distributed by the business.
#14. Agree On The Authority To Bind The Other Partners
Partners have equal authority to enter into agreements that will bind the business and the other partners. This would include contracts, leases and other agreements with third parties.
If this right is to be limited, it must be spelled out in the partnership agreement.
#15. Decide On Who Will Manage The Business
One way to avoid conflicts in the operation of business is to identify the role each partner will have in managing the affairs of the partnership.
#16. Decide On What to Do When A Partner Dies
The death or extended absence of a partner from the day-to-day affairs of a business can have a devastating impact on the partnership and on the other partners. An orderly method for the transfer of ownership of a deceased or disabled partner should be included in the partnership agreement.
#17. Agree On A Dispute Resolution Process
Most agreements include a provision for resolving disputes between the partners without incurring the costs or time associated with courts and litigation. A commonly used method for resolving disputes is binding arbitration.
Taking the time to pick the right partner and, once you make that decision, putting together a written partnership agreement will help to avoid conflicts that can destroy a business. An attorney and an accountant can offer other hints and suggestions for the success of your partnership.
Images: “Close-up of smiling man in formalwear/Shutterstock.com“
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