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Form a Successful Small Business Partnership: 5 Best Practices
Forming a small business partnership gives you an opportunity to combine financial resources and skill sets, which can expand your business capabilities. Here are a few best practices to consider before choosing a business partner.
Two Business Owners Discussing Their Business Strategy For A Small Business Partnership
You have a game-changing small business idea for an innovative product. But you may need help turning it into reality and decide you want to bring on a business partner. They can share their skills and knowledge, offer financial support and connect you with potential customers.
Adding a business partner can be good for your business when done right. Before you dive in, it’s important to understand the basics of forming a partnership. Follow these best practices to set yourself and your business partner up for success.
Understand the difference between a partner and co-owner
Being a partner is different from being a co-owner. Ownership of an asset by more than one person is called co-ownership. Both individuals own a percentage of the asset and share income and expenses. For example, a husband and wife who decide to purchase a home together are co-owners of that specific item.
Alternatively, a partnership is recognized as a business organization where two or more people carry out a business for the purpose of earning a profit. For instance, if a husband and wife buy a facility with the goal of starting their own business, it would be considered a partnership.
A partner:
Forms a contractual agreement with others.
Shares the business's income and expenses.
Shares group decisions with others about the business. No partner can transfer his interest or share without the consent of other partners.
Makes decisions about the business, contributing to the success of a product or service.
Contributes money, land or a building for a business.
There are three types of partnerships you can choose from.
A general partnership: Individuals share liability for debts and lawsuits equally. Personal assets are considered the same as business assets. And it’s easy to set up. You don’t have to file with the state, and you don't have to pay any ongoing fees.
A limited partnership: At least one partner has unlimited liability. The other has limited liability, so their personal assets aren't tied to the business. Choose this structure if you and your partner want different levels of involvement in the business. For instance, you may want to oversee day-to-day operations, while another wants to be a silent investor.
A limited liability partnership: Both partners have limited liability. It operates like a general partnership, where both partners manage the business, but limits their liability for each other’s actions. This provides the most protection for both partners. It can only be created by a professional in-service business, such as medical and dental, under each state’s law.
A partnership is recognized by the law – Partnership Act 1932 – as a business entity, which can be complex to set up. Before forming a business partnership, talk with an attorney. They can draw up an agreement that works for both you and your partner. It’s the best way to protect your and your partner’s interests as well as what’s best for the business.
Seek out a tax advisor who can help you and your small business come tax time. For instance, a partnership files an annual information return to report income, deductions, gains and losses, but does not pay income tax as a business.
Choose a partner with the same values and goals
You may think starting a partnership with someone you know, like a friend or family member, is the best route. But, it’s more important to find someone who agrees on the same values and goals to create a shared vision of the business.
They should also have the right skills and experience for the role. Find someone who has complementary skills. For instance, if you are good at marketing, try to find a partner who can manage the finances.
You want a partner that is financially stable. A business partnership typically requires sharing expenses as well as profits, so make sure your partner isn’t in a financial slump.
There’s no set number of partners that can be involved in a business. However, it's best to have the right players at the table. Each person is responsible and accountable for the success of the business.
Write a partnership agreement
No matter who you partner with, set clear expectations from the beginning with a written partnership agreement. It's critical to the success of your small business. Business partnership agreement template samples are available for free online through the Small Business Administration Resource Score to help you get started. Your lawyer should always review and revise your draft before you finalize it. A business partnership should include the following information:
Business specifics: Include the name of your business, its legal structure and business location. State the purpose of the partnership and detail what products or services the business will produce.
Ownership stake: Spell out how much of the business each partner will own. This is usually expressed as a percentage.
Titles and decision-making: Determine job titles and all decision-making duties. Consider who runs the day-to-day operations and makes the final decisions for the business.
Contribution amounts: Define how much money each person is putting into the company and outline your salaries. Determine how to distribute earnings and the financial risk you are willing to take.
Conflict resolution: Figure out how you’ll address and resolve potential conflicts with each other, employees, suppliers, customers or other stakeholders. This usually involves a third party to help resolve disagreements and disputes.
Business growth: Detail how the partnership can be modified and whether new partners can join the business. Outline your business plan and where you want to see the company be in 5, 10 and 15 years.
Unforeseen circumstances: Prepare your business for the unexpected, such is if a partner passes away or is unable to continue operating the venture. Include a clause on how your business could continue on without one or more of its founders.
Once your lawyer approves the business partnership agreement as legally binding, you and your partners can sign it to make it official.
Remember to revisit your partnership agreement on a yearly basis. You may need to add more partners, employees or expansion agreements.
Prepare for dissolving a partnership
Partnerships can dissolve for many reasons, including the recognition that you have different management styles. For instance, you may decide to partner with someone because you work well together but soon realize your management styles are not compatible.
Work with your attorney to include a partnership dissolution in your business partnership agreement. It will outline how the person leaving will be paid for their time, resources and involvement in the business. If you sell your business, write down how you’ll divide the proceeds from the sale.
You may decide to add an exit strategy to your partnership agreement if both you and your partner want out of the business.
Take some time to discuss the different scenarios that could happen and how you would handle them. This will give you the best chance to end your partnership on better terms and in a way that’s best for the business.
Meet with your commercial banker
Your commercial banker can guide you through forming a business partnership and offer advice about the different strategies you can use. They can also discuss what small business banking services are available and direct you to financial resources from the Small Business Development Center.
Contact our team of commercial bankers today to learn more about how Northwest Bank can help support your startup business.