What is a partnership in business? Considerations before venturing into one
*Two is better than one, right? If you’re a sole trader making your way in the business world with your own two bare hands, it’s likely you’ve considered sharing some of the responsibility of your small business. Much like a monogamous relationship, a business partnership can be highly beneficial or detrimental to your small business, depending on the partner you pick. Be selective!
Before you embark on one, let’s look at what a business partnership is, what it can be and points to consider when setting one up.
Business partnerships defined
In plain English, a business partnership is a structure in which two or more individuals are responsible for all aspects of the business. Each partner offers a special service or expertise. There are two main types of partnerships.
General partnership: partners manage the day-to-day business operations and assume liability (typically equally) as owners for any debt, lawsuits or other obligations the business may incur.
Limited partnership: includes both general and limited partners but the limited partners serve only as investors in the business and are not liable for the company’s debts or losses.
A limited partnership is usually employed where the partnership responsibilities and roles are uneven, therefore if you’re thinking about a limited partnership, consider the amount of involvement your limited partners will expect as it's often directly proportional to the amount they invest.
For the rest of this article, let’s zero in on general business partnerships as they are the most common.
The Financial Relationship
Whether you like it or not, a business partnership will affect all areas of your enterprise. Up to 70% of business partnerships fail, make sure your business partnership isn’t a statistic by carefully screening whom you allow into your business bed.
Take it slow
Besides couples in Vegas, most people don’t jump into marriage; they first take time to get to know each other. Look into their past experiences and endeavours. It’s important to know a potential partner’s business history.
Even if the candidate hasn’t been a partner before, see if it’s possible to meet with previous employers or coworkers to get a feel for how the person makes decisions, manages conflicts and operates on an organisational and financial level.
Similarly, if you haven’t worked with a person you’re considering making a partner in your business, it’s best to initially go on a “1st date”—tackle a small project or two together to see working methodologies, communication capabilities as well as shared core values. These are things that can only be revealed once the two of you work together.
What to look for?
The late Paul Allen became friends with Bill Gates as a kid and later convinced Gates to drop out of university to found what is today known as Microsoft. He was able to pinpoint Gates' capabilities as well as the market for them (Allen coined the company name). Find the Allen to your Gates.
Beyond sharing the general workload, you probably already have an idea of why you’d like to have a business partner. They can fill any of the following roles: guiding mentor, savvy networker, financial guru or even entrepreneurial spirit. Ideally, partners complement one another with a few areas of overlap.
Partnership advantages:
Capital: That’s the main reason you’re seeking a partner right? Partnerships provide greater access to loans and combined resources to invest in your business.
Expertise: Having different areas of knowledge among partners offers a more well-rounded approach to business.
Shared workload: Infinitely easier than flying solo in the business realm. Hello, vacation to the Peloponnese!
Tax cuts: A general partnership allows the business itself to not be taxed, but rather that the business partners pay taxes on an individual level, lowering the amount of taxes each must pay.
Contacts: Wasta ( واسِطة) is an Arabic word specifically used to describe one’s clout or access to people of power or influence. Who you know is everything in the business realm and if your business partner has a lot of wasta, your business could benefit as it will be degrees closer to contacts, clients, investors and the like.
Partnership disadvantages:
Major liability: Yup, in a partnership you’re assuming all liability for any debts and losses within the company (FYI: any mistakes said partner makes can lead to your personal assets being seized).
Sharing a reputation: While your partner will likely increase your networking pool, recognize that anything they say or do will directly reflect on you and your company.
Lack of total control: Regardless of who is wearing the pants in the partnership relationship, you are no longer in 100% control of the company.
Setting up a partnership: 2 steps only!
Setting up a general partnership is arguably too easy, much like a marriage in Vegas. Oh wait, we already covered that no? Two steps:
Register the partnership. Hi, tax break (brief bureaucracy required first).
Create a partnership agreement defining rights and responsibilities.
Registering a general partnership doesn’t require much sweat. Simply decide on a name and the involved partners and register at your local tax office. The real work comes later.
Creating a partnership doesn’t require a written agreement, but it sure is good to have one before starting. It would be worth your while to hire an experienced lawyer to help you set up a business partnership agreement entailing the rights and responsibilities of the partnership. This includes voting rights, how business decisions are made, how disputes are resolved, how to handle a buyout, etc.
Ground rules: No grey areas, please
Remember, setting expectations at the beginning is a great way to avoid situations leading to resentment. The more specific you are regarding your roles and areas of expertise within the company, the better you and your partner(s) will be able to measure the success of the partnership and with time, evaluate the effectiveness of each partner in their perspective roles.
Set performance indicators to measure what each of you is periodically bringing to the table. It’s okay to keep score in this relationship.
Prenup: Dissolving a partnership
Life happens. Don’t be surprised by it. It’s important to set up a partnership agreement that outlines “next steps” in the event of the death of a partner (knock on wood), declaration of bankruptcy, potential buyout, retirement or business sale. This inclusion is often referred to as a buy and sell agreement.
A business partnership is a neutral tool that can have a significant impact on your enterprise. Before following your infatuation with a potential business partner, take a beat to consider all of the possibilities of the partnership. If you decide to venture into one, take the time to ensure your business benefits from the partnership. Best of luck you crazy love business birds!
Looking for a low-maintenance business partner? Consider a SumUp Card Reader. It lets you focus on running your business while providing card payment options to your customers. Win-win.
