9 things to consider before forming a business partnership
Entering a business partnership has its benefits. It allows all contributors to share what is at stake in the business. Depending on the risk appetite of the partners, a company may have a general or limited liability company. The limited partners are only there to provide funds to the company. They have no say in business operations, nor do they share responsibility for any debt or other business obligations. General partners operate the business and also share their responsibilities. Since limited liability companies require a lot of paperwork, people often form general partnerships in companies.
Things to consider before establishing a trade association
Trade associations are a great way to share your profits and losses with someone you can trust. However, a poorly executed partnership can be a disaster for the business. Here are some helpful ways to protect your interests when forming a new business partnership:
1. Be sure why you need a partner
Before starting a business partnership with someone, you need to ask yourself why you need a partner. If you are looking for just one investor, then a limited liability company should suffice. However, if you are trying to create a tax shield for your business, the general partnership would be a better option.
Business partners must complement each other in terms of experience and skills. If you are a tech enthusiast, teaming up with an experienced marketing professional can be very beneficial.
2. Understanding of your partner’s current financial situation
Before you ask someone to commit to your business, you need to understand their financial situation. When starting a business, a certain amount of startup capital may be required. If the trading partners have sufficient financial resources, they will not need funding from other resources. This will reduce a business’s debt and increase the owner’s equity capital.
3. Background check
Even if you trust someone to be your business partner, there is no harm in running a background check. Calling a couple of professional and personal references can give you a clear idea about their work ethic. Background checks help you avoid future surprises when you start working with your business partner. If your business partner is used to staying up late and you are not, you can divide the responsibilities accordingly.
It is a good idea to check if your partner has any prior experience running a new business venture. This will tell you how they performed in their previous endeavors.
4. Ask an attorney to review the association documents
Make sure you get a legal opinion before signing any partnership agreement. It is one of the most useful ways to protect your rights and interests in a business partnership. It is important to have a good understanding of each clause, as a poorly written agreement can lead to liability issues.
You must make sure to add or remove any relevant clauses before starting an association. This is because it is cumbersome to make changes after the agreement is signed.
5. The association must be based solely on commercial terms
Trade associations should not be based on personal relationships or preferences. Strong accountability measures should be put in place from day one to track performance. Responsibilities must be clearly defined and performance metrics must indicate each individual’s contribution to the business.
Having a weak system for measuring performance and accountability is one of the reasons many partnerships fail. Instead of trying, the owners begin to blame each other for the wrong decisions and it results in losses for the company.
6. The level of commitment of your business partner
All partnerships start on friendly terms and with great enthusiasm. However, some people lose their excitement along the way due to daily work. Therefore, you need to understand your partner’s level of commitment before entering into a business partnership with him.
Your business partners must be able to show the same level of commitment at every stage of the business. If they do not remain committed to the business, it will reflect on their work and can also be detrimental to the business. The best way to maintain the level of commitment of each business partner is to set the desired expectations of each person from day one.
When entering into a partnership agreement, you should have an idea about the additional responsibilities of your partner. Due attention should be paid to responsibilities such as caring for an elderly parent to set realistic expectations. This results in compassion and flexibility in your work ethic.
7. What will happen if a partner leaves the business?
Like any other contract, a business company requires a prenuptial agreement. This would describe what happens in the event that a partner wants to go out of business. Some of the questions to answer in such a scenario include:
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How will the outgoing party receive compensation?
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How will the division of resources be carried out among the remaining trading partners?
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Also, how will you divide responsibilities?
8. Who will be in charge of daily operations
Even when there is a 50-50 partnership, someone must be in charge of the day-to-day operations. Positions, including CEO and Director, should be assigned to the right people, including business partners, from the start.
This helps create an organizational structure and better define the roles and responsibilities of each stakeholder. When each individual knows what is expected of him or her, they are more likely to perform better in their role.
9. You share the same values and vision
Entering into a business partnership with someone who shares the same values and vision greatly facilitates the execution of day-to-day operations. You can make important business decisions quickly and define long-term strategies. However, sometimes even like-minded people can disagree on important decisions. In such cases, it is essential to consider the long-term objectives of the business.
Bottom line
Trade associations are a great way to share responsibilities and increase funding when starting a new business. For a business partnership to be successful, it is important to find a partner to help you make fruitful decisions for the business. Therefore, pay attention to the comprehensive aspects mentioned above, as a weak partner or partners can prove detrimental to your new company.
