How Entrepreneurs Succeed In A Business Partnership

Do you plan to start a business with a family member, friend or another colleague who shares your vision next year? You may enter a business partnership. Forming a partnership allows you to develop a business idea with a partner and team up to start the new venture.

However, it’s important to understand how business partnerships work so all parties can thrive in them. Here’s what entrepreneurs need to know about succeeding in a business partnership.

1. Research Different Types of Partnerships

Going into business with a partner means understanding the way they would like to run the business, and vice versa. A partnership entity formation comes in several structure options.  

General Partnership

A general partnership is the most common type of partnership. It establishes an agreement across the partners running a business. You divide all profits, liabilities and management duties equally across the partners.

However, there is one downside to a general partnership. This entity is does not offer limited liability protection. In the event business debt incurs, partners do not have a limit on their personal liability for the debts of the business. Partners would need to use their personal assets to repay the debt. Rather than risk this type of liability, partners may choose to incorporate as a limited liability company (LLC).

Joint Venture Partnership

Joint venture partnerships share most of the same similarities as general partnerships. However, a joint venture partnership is temporary. This type of partnership expires. Typically, it is put into place to speed up certain business processes or when a phase of development is complete.

Silent Partnership

A silent partnership is for partners who wish to be less active in the company. In a silent partnership, one partner acts as the financial muscle of the business. They help secure capital and make this their primary focus.

As such, they do not participate in the company’s daily operations. A different partner assumes this responsibility. Make sure to discuss with your partner beforehand what everyone will be held responsible for in a silent partnership.

Limited Liability Partnership (LLP)

A limited liability partnership (LLP) provides businesses with the same limited liability found in an LLC. This protection ensures personal and professional assets remain separate. The personal belongings of a partner, like houses and cars, would not be used by the partner to repay business debt.

You need to determine if your profession allows you to incorporate under an LLP. This partnership structure is for professionals in licensed professions by the state. Examples include doctors, lawyers, accountants, dentists, and psychologists.

2. Create a Written Partnership Agreement

Now you’re familiar with partnership entity structures, it is time to draft a written partnership agreement.

What is a partnership agreement? This is a document which holds each partner accountable for their roles and responsibilities in the partnership. You may already know you will work together. What does this work look like? A written partnership agreement outlines the following clauses:

Partnership Term. This is the official start date of the partnership. It includes the month, day, and year. The partnership is expected to continue indefinitely unless there is a termination date. A joint venture partnership, for example, would include a specific end date.

Responsibilities. The role each partner plays in the partnership, and their daily responsibilities, is in this section.

Capital. How much capital did each partner contribute to the partnership? State the full amount. Include additional details about how, and when, partners are to be paid, the profit and loss terms for each partner, and the account where the money will be kept.

Admitting New Partners. This section outlines the process for admitting new partners and the roles the partners will play in it.

Voluntary/Involuntary Partner Withdrawal. What if a partner leaves the partnership, or involuntarily leaves? Terms must outline the withdrawal process. In some cases, this may lead to the dissolution of the partnership.

Death of a Partner. In the event a partner passes away, an agreement must outline the rights of the surviving partner(s).

Does Your Business Partnership Need a Written Agreement?

It is highly recommended partners create a written partnership agreement. An oral agreement may create complications in a partnership. For example, it may become difficult to recall the exact date when certain terms were put into place.

What if your state of formation asks about the written partnership agreement? Being unable to produce a written agreement may put your partnership into hot water. It may cause your business to lose its credibility. The business may even fall into bad standing with the state.

3. Obtain an EIN

The IRS issues EINs to help identify the employer tax account of businesses. Many business owners use their Social Security number on business documents. In a partnership, however, this is not feasible. A partnership includes at least two partners, or owners. Therefore, you must obtain an EIN and have at least one partner use it prior to launching a partnership.

Over time, you may make small changes within your partnership. You may amend this agreement. You can admit new partners. The business itself may head into new and exciting directions.

Discuss it all with your partner. Review and vote together on everything before moving forward. Enjoy the teamwork a business partnership brings you and your partner.

Form a partnership with our assistance. We can help you get started! Contact us at mycorporation.com or give us a call at 877-692-6772.