Starting a new business with a partner is much less overwhelming than trying to do everything on your own. You each bring a certain level of expertise in different areas that make you stronger together. As a business entity, a partnership is a step up from a sole proprietorship. The difference is that each of you owns half the business. This also means that you divide its assets and liabilities.
While a business partnership has many advantages, both people should also exercise extreme caution when starting a new company together. It’s important to agree on who is responsible for what to avoid making assumptions that could have devastating consequences later. Drawing up a partnership agreement before officially launching the business is always a good idea. Having an official document now can help both of you avoid serious disagreement later.
Determine Ownership Rules Right Away
You may get a few years into running the business when one of you wants out. It can cause unnecessary stress and conflict when you don’t know what to do in this situation. That’s why it’s a good idea to put in writing whether one partner must buy the other out as well as what will happen if a partner dies, retires, or files personal bankruptcy.
It’s better to spell this information out now and never need it than to be in a position of not knowing how to continue the business because something unexpected happened. This is also true in the case of taking on new partners in addition to the original two.
Define Each Partner’s Contributions
Each person must be willing to contribute time and money for the business venture to work. We recommend putting this information in your partnership agreement. In addition to the original investment, it should include expectations for hours worked per day, who is responsible for buying and maintaining equipment, who will have primary responsibility for customer attainment, and other essential issues.
How to Distribute Profits
The whole goal of going into business together is to make money. Before your company earns its first dollar, decide how much and how often each of you will receive a paycheck from the business. If one partner invested significantly more than the other to start the business, it makes sense that he or she would receive a larger paycheck. Of all issues in business partnerships, this one can cause the most tension. It’s worthwhile to take the time to put it all in writing now.
Disputes and Major Decisions
No two people agree on everything, even those who go into business together. When you create the partnership agreement, consider including a clause about the approach to daily and long-term decisions. Does one partner get veto power or the final say? Are there some decisions that one partner can make on his or her own and others that require agreement between partners? If so, include the details of how to handle these issues in your written documentation. It’s also important to include a clause about dispute resolution when you and your partner simply can’t come to agreement on a matter.
Need Help Establishing a Partnership Agreement?
It can feel intimidating to draft a partnership agreement when you have never done so in the past. Our company has many years of experience helping small businesses through this process and would be happy to do the same for you
You need all the help you can get to run a small business successfully, and Doerhoff & Associates is here for you. We strive to provide what you really want and need – a unique and customized set of services to fill the gap and support you, the business owner.