Starting a small business can be a crazy adventure. It’s kind of like dating. It’s exciting and new and full of uncertainty, but in a good way! So how do you know when to lock it down with a business partner?
In any good partnership, there needs to be clear communication. You should consider the following with your potential business partner before taking the plunge:
Before you get started, double check that your partner is not bound by any non-compete or non-solicitation agreements from their former employer. This is a consideration for you to make if you were recently or are currently employed. If you’re both in the clear, next you should select a formal business entity before committing to anything big. Make sure you’re on the same page about your goals, because this will often affect what kind of entity is best for your business.
Percentage of ownership; profits and losses.
A percentage of ownership provision minimizes the potential for misunderstanding in the future. This is especially important if one partner plans to contribute through “sweat equity,” also known as contributing only their time and/or labor. For the sweat equity partner, this comes in handy when you’re deciding how much your effort was worth. Unfortunately, there is no magic formula for deciding how much equity is right for you; just make sure you decide on something. And don’t forget profits and losses, because this goes hand-in-hand with ownership. Unless otherwise specified in the partnership agreement, profits and losses will be allocated by the percentage of ownership. Keep in mind that this decision will also have tax implications, so be sure you have a CPA cued up for that conversation!
Roles and responsibilities; binding the partnership.
Decide from the outset what each person’s specific roles and responsibilities will be and include this in the partnership agreement. Who will be managing the day-to-day? Will they be given additional compensation? How will big decisions be made for the partnership? This keeps everyone on notice for what their job duties do or do not include. You should also consider who can “bind,” or obligate, the partnership in any contracts. If the partnership agreement is silent on this, it means that any partner has the right to bind the partnership in any decision, without the consent of the other partner(s). Oh, the headaches you’ll avoid if you’re clear on all of this from the beginning!
Sometimes there will be hard conversations in a partnership. No one likes having them, but if you have these conversations early, you’ll be set for many years of happiness later in life:
Modifying the partnership agreement.
So you messed up. You left something out or you put in a provision that’s just not working for you. It could feel like the end of the world, but fixing the issue can be relatively easy if you decide ahead of time what the process should look like. Consider whether there should be certain circumstances when the option to modify will arise, what type of vote will be required to approve the changes, and who will effectuate the changes, among other things.
Disagreements are hard to think about when everything is shiny and new, but even the best of partnerships face issues. Creating provisions ahead of time for settling any future disagreements can make things a feel a little less chaotic when you’re in the thick of it. For example, if you decide disagreements will be settled through mediation, include in your partnership agreement how that mediator should be selected. Having provisions like this becomes especially important if you’re part of an even-numbered partnership (because hello, gridlock!)
And sometimes partnerships just don’t work. As hard as it is to consider, you should think about exit strategies from the beginning. What happens if your partner wants to leave? Or if you want to leave? What will a buyout look like? What if your partner dies? Retires? Again, these sort of issues should be addressed in the partnership agreement.
Just like in dating, you should never settle for a partner. So don’t rush into anything; really weigh the pros and cons. Take a good, long look in the mirror and ask yourself some of these questions before committing:
Do you trust this person? How much?
This should be pretty high on your list of questions. For instance, if you’re in a general partnership you face unlimited liability. Because of this, if your partner has a lapse in judgment, you are just as liable for any damages as your partner is. This is just one of many reasons why you want to make sure you wholeheartedly trust your partner.
Do you share values? How do you know?
Unfortunately, there may be times while running your business that it feels like it’s you against the world. The best thing you can have in those difficult moments is a partner who shares your vision and has your back. But when you’re choosing your partner, make sure they don’t just talk the talk. Look for someone who walks the walk. You should mirror each other in how you live out your vision for the partnership.
What do they offer in this partnership? Is it okay if you offer something else?
Sometimes opposites attract and sometimes they do not (Not literally. We’re lawyers, not physicists.) Be honest with yourself about what types of people you work best with. Are you more productive and fulfilled being surrounded by people just like you? Or do you like to be challenged by those with a different perspective? Again, be honest; there’s no wrong answer. Just know what works for you and look for that in your partner.
These are just some of the many issues to consider when starting a small business with someone. So be wise! Don’t rush! And if you have any other questions on what you can do to make sure you’ve found “the one” (business partner, that is,) feel free to reach out! We’re always happy to help.
By: Olivia Phillips – 11/02/17
Disclaimer: Although this article may be considered advertising under applicable law and ethical rules, the information in this article is presented for informational purposes only. Nothing should be taken as legal advice. Reading this article does not form an attorney-client relationship with us. An attorney-client relationship is formed through a signed engagement agreement. If you would like further information, wilkmazz pc would love to help you out! Feel free to reach out with any questions.
Photo Credit: © Bryan Apen