Forming business partnerships comes with a variety of benefits and allows partners to share organizational responsibilities and financial requirements. However, partners in a general partnership don’t have any limit on their personal liability for the debts of the business. This means that the partner may have to use personal assets to pay business debts if necessary. Forming a business entity can protect you from these potential threats. In a recent Business Week article, John Gerber, a long standing business attorney, offers several useful pointers for partners to protect themselves in business matters.
The first is to “start at the end.” It is wise to decide from the beginning of the business partnership what will happen if one partner exits. The goal is longevity and prosperity but a business must be prepared for the worst. Garber relates it to a “pre-nup in a marriage.” Having a legally viable exit plan before it is needed, and before emotions and/or animosity is running high, is invaluable.
“Deciding who decides” is the next tip. It should be a general rule of thumb to put anything to be taken seriously in writing, especially if it is concerning the decisions of a company. How a company is to be governed is no exception. It is important to write down what each partner’s responsibilities and level of control are, as doing so can spare major confusion and grief in day-to-day operations.
A vital tip is to “protect the personal.” Establishing a partnership as a legal entity (i.e. corporation, LLC, or LLP) from day one protects the partners from personal liability, so that their personal assets cannot be touched if something happens to the company. This is one of the major benefits attached to forming such a business entity.
Garber also advises to “assess your commitment.” Everybody in a partnership starts with ideas about their commitment, but sometimes life gets in the way. It is important to talk about competing priorities and to know how they’ll be handled if they arise. This creates a sense of fairness and trust that is needed for a good partnership.
Forming a business entity is a vital step in protecting against external business threats, and following Garber’s advice will protect partners from internal threats as well. Taking these early precautionary steps could be the key to a successful entrepreneurial endeavor.
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