Business Partnerships 101 – What You Should Know

Business Partnerships 101How much do you really know about you partner? What is their business background, business approach, and vision of a partnership? Fundamentally, these are basic questions that one would assume a business partner would know about their business partner; however, you might be surprised how many partners rush into a business relationship without this knowledge.

Some issues to consider:

  • Only and only go into business with someone you trust, which means you need to do research by running a background check and calling personal references.
  • Discuss worse-case scenarios and any potential issues you might come across with your partner. If your partner is not willing to discuss potential issues, then they are the wrong partner for you.
  • This is common sense – before signing anything make sure you understand what you are signing. Find an attorney to help you with the documents and language; however, you and your business partner need to work together as a team and share responsibilities on how to run the business.
  • If any concerns come up get a separate counsel.
  • Have the partnership/operating agreement and any amendments signed by the business partner’s spouse if living in a community property state. This is important in order to protect your share in case you buy the partner out, get a divorce, or the partner passes away.

Establishing the Partnership

The two most important steps in establishing a partnership are: creating the partnership agreement and properly structuring it for the type of partnership it will be. The key to understanding your partnership agreement is to know how the business will be managed.

Here are the top ten items to consider in a solid partnership agreement:

    1. Make sure everyone has a clear understanding of their role in the business and who is authorized to do what.
    2. Make sure each partner is aware of their responsibilities and duties and if one fails to perform their duties then consequences should be enforced.
    3. How much time, money and assets each partner is contributing to the business needs to be addressed.
    4. The partnership agreement must include how profits, distributions, compensations and losses will be distributed.
    5. Have a clear understanding of which decisions need a unanimous vote.
    6. Dissolution or exit strategy must be addressed in the agreement.
    7. Decide whether you need a buy-sell provision or separate one.
    8. Consider including an expulsion provision, which can be beneficial for forcing a partner out when they are not doing their job.
    9. Include a noncompete provision in case you or your partner wants to go solo.
    10. Miscellaneous provisions might include attorney fees, mediation, and binding arbitration for the non -breaching party.

Best Structure for a Partnership

The best business structure for a partnership is limited liability company (LLC). Yes, every partnership is unique; however, establishing an LLC is beneficial not only because you save on taxes, but because you can have each share of the LLC owned by an S corporation which allows for even more protection and flexibility.

Here are 3 reasons why establishing a LLC is great for a partnership.

      1. An LLC protects each partner from the others actions.
      2. The partnership terms are defined within operating agreement and corresponding initial minutes.
      3. The LLC provides flexibility for receiving profits, losses, and capital as well as each partner does their own tax planning.

Other Partnership tips:

Once your business is up and running, here are other helpful habits to follow.

    1. Maintain and keep communication logs and documentation of anything that contradicts the original agreement.
    2. Always be involved in your business and fulfill your responsibilities and duties.
    3. Make your tax deposits on time and keep records of all your financial affairs.

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