eBusiness Weekly
Dr Keen Mhlanga
A business partnership is a commercial relationship formed by two or more individuals or companies to share profits, risks and losses. Individuals can benefit from their partners’ experiences and expertise, pool resources, and expand their capital by forming a partnership. Medical, accounting, and legal professionals frequently form business partnerships, but family members can also be involved.
There are two types of partnerships: general partnerships and limited partnerships. General and limited partners are both present in a limited partnership. The general partners own and operate the business and bear partnership liability, whereas the limited partners are merely investors with no control over the company and are not subject to the same liabilities as the general partners.
Because of all the required filings and administrative complexities, limited partnerships are generally not the best choice for a new business unless you anticipate a large number of passive investors. A general partnership is much easier to form if you have two or more partners who want to be actively involved.
Personal liability is a major concern if you structure your business as a general partnership. General partners, like sole proprietors, are personally liable for the partnership’s obligations and debts. Each general partner has the authority to act on behalf of the partnership, make loans, and make decisions that affect and bind all of the partners if the partnership agreement permits. Remember that partnerships are more expensive to set up than sole proprietorships because they necessitate more legal and accounting services.
Establishing a business partnership is a relatively simple process; because it is not a legal entity, it does not necessitate the legal or formal steps required to establish a corporation, nor does it necessitate the filing of a written agreement with federal or state agencies. However, business partnerships should create a partnership agreement that defines the terms of the business relationship, including roles and responsibilities within the partnership. Unlike a corporation or a limited liability company, or LLC, business partners are personally liable for the partnership’s debts, which means that their personal assets may be subject to creditors.
Forming a partnership is a legal commitment, so each partner’s roles and responsibilities must be clearly defined. Make a partnership contract. Some entrepreneurs who start a business with family or friends do not believe they need a formal legal partnership agreement. That could be dangerous. Legal documents are required regardless of who you are starting a business with.
Is one person putting in more money than the other? That doesn’t mean they’ll automatically earn more; you may need to account for sweat equity or other factors. Or will earnings be divided equally? Again, this must be defined ahead of time. Will there be one CEO or two? Who has the final say? Who will manage the company on a daily basis? Will you seek the assistance of a third-party mediator? Where do employees go to get answers? Will one of the partners be more public-facing, or will those responsibilities be shared? Do all partners have the ability to sign checks and contracts?
You must anticipate potential problems and plan for every eventuality. For example, what if you run a business with your spouse and get divorced? Who is in charge of the company? Although it might appear premature, the steps for a potential partnership breakup should be addressed in the partnership agreement from the start. For example, what happens if one of the partners dies, retires, or decides to leave the company? Will the departing partner be required to first offer their shares to the remaining partner, to their family, or to a third party?
A partnership can be formed as a general partnership, a limited partnership, or a limited liability partnership. You can also choose to incorporate as a C or S corporation. Each business structure has advantages and disadvantages in terms of liability, taxes, and continuity. Consult with an attorney or another experienced advisor to determine which business structure is best for you and your partner.
Many experts advise incorporating your partnership to protect the partners from any debts or other liabilities incurred by the company. Choosing the best business formation can be complicated, so consult an accountant to ensure you’re making the right decision.
Communication is perhaps the most important aspect of sustaining a successful partnership. You must feel comfortable discussing any issues with your partner. Just remember to be considerate of their viewpoint. Schedule regular meetings, either in person or via video call. Talk about how you’re doing personally in addition to business. It makes you feel more invested in each other’s lives.
Keep in touch on a regular basis. In addition to meetings, check in with your partner on a daily basis, even if it’s just a quick text or email. Pay close attention. Don’t be defensive if you disagree on an issue. Instead, listen to what your partner has to say so that you can make a joint decision that is in the best interests of the company.
Only when you choose to establish your company as a partnership, make sure you draft a partnership agreement that outlines how business decisions are made, how disputes are resolved, and how a buyout is handled. You’ll be glad you have this agreement if you have problems with one of the partners or if someone wants to leave the arrangement.
The purpose of the business, as well as the authority and responsibility of each partner, should be addressed in the agreement. It’s a good idea to seek the advice of a small business attorney when drafting the agreement. Really do not look for someone “just like me” when seeking a business partner. Rather, having a partner whose strengths balance your weaknesses and vice versa is the key to a successful partnership.
For instance, if you and your prospective partner are both good at sales, who will be in charge of the other aspects of running a business? An introvert would benefit more from collaborating with an extrovert than with another shy person. If you’re not good with details, it’s best to work with someone who is. Remember the phrase “the whole is greater than the sum of its parts”? That is your goal: a better, extra equitable entire.
However, it is critical that you and your partner share the same values and work ethics. Don’t start writing a business plan until you’re sure you have the same dreams, goals, and vision for your new venture. Check that both of you are committed to full-time work and have the same end goal in mind. A business disaster is a partner who wants to build a legacy company to pass down to their children and another who wants to sell to the highest bidder as soon as possible.
If you’re doing business with someone you don’t know well, make sure you do your homework. Talk to their former co-workers if possible. Examine their social profiles all of them, even if they don’t appear to be business-related. Perform an online search for them. Consult with others in your field. You should also run a credit check on them. Inform them that you believe they should also check your credit.
Owning and operating a business with a partner can be both rewarding and challenging. It also has some benefits and drawbacks. Unfortunately, finding a reliable, trustworthy business partner is difficult, which is why so many entrepreneurs start a business with family or friends. On the surface, it may appear that collaborating with someone you know is simpler, but this is not always the case. And getting it wrong can break up a friendship, a marriage, or a family relationship.
Dr Keen Mhlanga is an Investment Advisor with high skills in Finance. He is the Executive Chairman of FinKing Financial Advisory. Send your feedback to [email protected], contact him on 0777597526.
