You and a friend or associate decide to go into business together and form a partnership. That’s great, I’m sure you’re both happy and hoping that everything works out the way you’ve dreamed it ought to be. You've both been tied to dead-end jobs for years, and the time has come to seize your own dreams and own destiny instead of helping someone else find theirs.
If you would indulge me for a moment I would like to impart some wisdom on this subject before getting to the actual point. I have been engaged in several partnerships and I have come to find the ones that work are when certain things are present at the beginning, and all the way through the business relationship.
The first is, the partners are equally investing the same amount of time and money to get the business up and running. They should both share the same mission and goals. They need to depend on one another's unique expertise to make the business grow and flourish. For instance, one partner is tech-savvy. Technology is a critical part of the business structure, so the tech guy/nerd works in his own space and rarely intrudes on his partner’s workspace. The other partner is a wiz with sales and marketing. He’s the front guy, the handshaking backslapping people person. He’s also great at managing people, while his other half, the nerd, is content to stay in the background and work with his computers. It is important that they have different skill sets that complement the business while working on different ends of the street. They can rely and depend on each other’s strengths without getting in each other’s way. It’s an old adage, too many cooks in the kitchen spoil the broth. I will digress no further. The first thing that a partnership need is a contract. Let’s look at some different types of partnerships, of which there are many. I’ll list some of the most common ones:
General Partnerships
Active/Managing Partner. ...
Sleeping Partner. ...
Nominal Partner. ...
Partner by Estoppel. ...
Partner in Profits only. ...
Secret Partner. …
Outgoing partner.
Limited partner.
I’m not going to bore you with the details of all these types of entities. Let’s just use a simple example. You and a friend decide to quit your jobs and go into business together. You’ve drawn out a good business plan, allocate enough money to build the business, and keep it afloat until it begins to generate revenue. You’ve created an exit strategy, got all of your business and tax licensing together, opened a business account, and now you feel like you are ready to roll.
Before you go any further you want to set up a General Partnership agreement that sounds out all the terms and conditions that you have both committed to in good faith and clear understanding. And remember, this because is primary. You are responsible for what your partner does while working in the business. So, even if you’ve known a guy for a long time and believe you trust him because everyone else seems to, don’t go full steam ahead until you are certain to the highest degree possible, that you are getting involved with the right person.
Because you will be sharing a business that hopefully will be carrying substantial assets and profits, along with those things comes liability. It is of major importance to describe in detail in the contract where the distribution of responsibilities lies.
Writing things out and discussing the terms amongst yourselves is the best thing to do. It will help shed light on each of your roles in your two-man organization. The main thing, you want to agree on is the division of labor between you and your partner (who does what) to avoid stepping on each other’s toes and killing each other. To help you avoid failure, even at the risk of being redundant, I can’t stress this enough: (Define your roles) and stick to it. Commingling job duties is a sure deal killer.
You also want to set up your partnership with contingencies that allow for disagreements to be resolved without damaging the health of the business, such as implementing a mediation clause in place of a lawsuit. The last thing you want to do is start suing each other if you have a disagreement. Most of the time things can be worked without lawyers and courtrooms, especially if you bring in a third party to referee and mediate a conflict.
You also need a clause that sounds out how you are going to dissolve the partnership should things go get to the point where you have to dissolve the business.
What else needs to go into the contract? First, you need to name yourself and your partner as the business owners. You get an extra ten points for that. Then find a good name for the business. Once you decide on a name you’ll need to do a fictitious name filing, along with a business license, and EIN numbers.
All of these things you should be able to get online or at your local State municipal building.
For our purposes here, we will use the example of an equal 50/50 split, where each partner shares the same amount of expenses, profits, and liabilities. Put that in the contact and underline it. Make sure your partner has no secret hidden debts creating a risk of somebody placing a lien against your business. These things happen all the time. They have happened to me more than once.
Now, let’s talk about death for a moment. Not a cheery subject, but what happens if one of you dies? Set the terms. What goes to who, who is left with what? Are you both married? Do you have children? Are they entitled to some portion of the business if their loved one, who happens to be your partner dies? Protect yourself, or you could wind up with your ex-partners’ wife as your new partner, with all kinds of new ideas of how to run the business that you never thought of and have no desire to do.
If the contract wasn’t written to protect you, the wife, or another family member could force you to sell and hand over half the profits. So be careful. If the verbiage is not properly sounded out in the terms and conditions of the agreement you could find yourself in a tough spot. The best way to mitigate that risk is for both of you to take insurance policies out on each other. One that covers the blow of an untimely demise or total disability. Even with an insurance policy, you have to be careful about naming who the beneficiary is and what they are entitled to.
Don’t take anything for granted. Sit down with your partner and discuss what your goals are as much as you can. Things like when you are going to start pulling salaries, and how much you are going to reinvest into the business either of you takes a dime.
The nature of almost all businesses carries enough aggravation on its own merit. There is no reason to add to it by not doing the proper things at the proper time. And remember, in a partnership your personal assets are not protected. You are liable for the actions of your partner. Be careful, and write the contract together, or do it in front of a reliable third party. Don’t let anyone write a contract for you or without you. Make sure to exercise your own personal input to its full limit, and complete the document only when both you and your partner have a complete understanding and agreement on it. If you need help call me.
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