Opportunities to start a business can happen at any time, even during a pandemic. Amid COVID-19, many individuals spent their time in quarantine practicing a side hobby or developing a new offering that meets the needs of their target audience. As more people lean into entrepreneurship, some have decided not to go it alone. Instead, they’re teaming up with a partner.
Going into business with a partner can be a fantastic decision. You’re able to focus on what you’re passionate about alongside a like-minded individual. Many great partners are also the same people we have known for years, like friends, family members and colleagues.
Running a business with a partner, however fun and familiar that partner may be, is still a lot of hard work. Getting the business up and running means making decisions, balancing strengths and weaknesses, and ensuring all partners stay on the same page about the company.
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Before starting a business with a partner, follow these guidelines for ensuring the startup (and team) succeeds
Determine which entity to incorporate as
Which entity should you incorporate the business as? Many entrepreneurs may initially default to a partnership entity, but it’s important to know that your business has options. These options further open up depending on the number of partners in a business, too.
For instance, let’s say you decide to incorporate as a partnership. Depending on what your business does, you may choose a specific partnership formation.
- General partnership: This is the most common partnership entity. Two (or more) partners run the company together. Profits, liabilities and management duties are divided equally across all partners.
- Joint venture partnership: A temporary partnership designed for when a certain phase of development has been completed or to speed up a certain business process.
- Silent partnership: One partner assumes the responsibility. The other partner(s) provide(s) capital and chooses to stay behind the scenes.
- Limited liability partnership (LLP): This entity is a little bit like a limited liability company (more about that in a moment) since it provides liability protection to its owners, or partners. However, an LLP is typically reserved for individuals in specific professions. Think doctors and lawyers.
Outside of partnerships, what other common entity formations are available for partners to incorporate as?
- Limited liability company (LLC): As mentioned above, an LLC provides its owners, or members, with liability protection and flexibility for choosing the way you’d like to be taxed. Members may also incorporate as specific types of LLC formations (including single member, member managed and manager managed) depending on the number of members.
- Corporation: This entity is ideal for partnerships that hope to expand globally or take their companies public. A corporation provides liability protection under a structured entity. A board of directors may be established, shares can be issued, and investors may invest in your business.
I singled out these two entities due to their written agreements — an LLC operating agreement and bylaws, respectively — that are key for entrepreneurs considering a business partnership.
Related: 12 Keys to Family Business Success
Draft a written partnership agreement
Should you decide to incorporate as an LLC or corporation, the next thing you’ll need is a written partnership agreement. In an LLC, this is commonly referred to as an LLC operating agreement. In a corporation, these are called bylaws. Much of the material in each document covers these specific areas.
- Terms and responsibilities: When did the partnership start? Detail the start date of the partnership as well as any terms for termination. Outline the responsibilities each partner has in the business, as well.
- Capital: This section defines the amount of capital contribution from each partner. It also details what the terms look like for profits and losses split between the partners.
- New partner admittance: Are there guidelines for admitting a new partner? Include details here for this process and how partners are admitted into the partnership.
- Voluntary and involuntary withdrawal of a partner: In the event that a partner wants to withdraw from the company (or must involuntarily do so), explain the terms for the process of withdrawal.
- Death of a partner: In the event of a partner’s passing, outline the right of the surviving partner(s) to liquidate the business or purchase the decedent’s interest in the written agreement.
Prioritize transparency in your partnership
You’ve laid out the foundation for how to successfully run the business together through incorporation and a written agreement. Each partner clearly understands his or her roles in helping the business succeed.
Maintain transparency between partners starting on day one in business. Be honest with one another, and commit to working hard in order to achieve your common goals. Follow the mission and values created for the business. If you don’t already have a mission statement, begin working on one together.
Look at this partnership as more than an opportunity to go into business. See it as a rare chance to expand your relationship with an incredible individual who is now your business partner — and part of the dream team.
Originally published July 27, 2020.