Business partnerships are excellent for entrepreneurs looking to spread their risks, share ideas and generate more money. Unfortunately, many business owners focus on only the benefits instead of considering the entire pros and cons of the partnerships before venturing into them. However, partnerships can be a rollercoaster, so it is essential to be thorough. Creating a business partnership can be thrilling, but consider the eight factors below before going ahead.
Put everything on paper
Failing to document your agreement is one of the biggest mistakes you can commit when entering a business partnership. It is important to put everything in writing regardless of how well you know your partner or personal relationship. Some states may not require a written agreement when entering a partnership. But, a well-prepared agreement or contract can protect you from any personal liability problems that may come up. Take steps to establish guidelines before proceeding. The agreement should be useful for dispute resolution since standard partnership laws in some states may not be sufficient for your partnership’s complexities. It is easy to ride along when the partnership is small and growing. But emotions may supersede logic when the business starts generating good revenues, and having a contract will be useful under those circumstances
Think about the tax implication
The structure of the partnership may determine how much taxes you pay. So it is fair to understand how you and your partner will be taxed. The basic norm for all forms of partnerships is that tax is paid by each member, not by the partnership itself. Therefore, the revenue from the partnership is added to each partner’s other taxable income. This means that partners are taxed based on their total earnings, including their percentage of the partnership profits. While partnerships and new alliances offer significant revenue and earning potential, aspects like taxing can make it less exciting. Learning the tax implications can enable you to choose the right structure to keep more money.
Set out roles and expectations
For a business partnership to thrive, it is essential to determine and discuss what each party brings to the table. This way, you can manage roles and expectations. This can help prevent any form of resentment emerging during profit sharing or when assessing individual efforts. Each partner should have clearly defined roles and responsibilities for the partnership’s daily operation in line with the business’s sole interests. Nobody wants to think about the worst-case scenario, but you must safeguard your interests and that of your partner. Deal with these at the beginning by including them in the contract before they become full-blown problems later.
Consider your goals and values
Learn about each other’s goals, vision and values before forming a business partnership. That’s because your collaboration with the other party can only thrive when these are aligned. You risk having problems along the way if you fail to tackle this from the start. When considering your goals and values, it can be uncomfortable to be brutally honest. Additionally, it can be tempting to want to compromise, to protect others’ feelings. However, unfortunately, this can set up grounds for deep problems in the future, getting in the way of the business’s long-term goals.
Background checks for potential partners
Going into a partnership too fast is one of the biggest mistakes people make. According to psychological theories, people reveal their true selves after a year, and business and money can bring out the worst in people. It is okay to give yourself some time to study your partner before entering into a corporate relationship. You can begin with a short-term business project to see how it goes. Also, develop your abilities to read people and support them with references and move on when projects don’t go well. You can also consult private investigator experts to learn more about people before making any long-term commitment. Lastly, always have a backup plan in case things go south.
Consider partnership scalability
Scalability is important when setting up a business, and partnerships are no exception. How much the partnership can grow is an important factor since the benefits must outweigh the costs. Resources to consider in this regard include time, and money, among others. If the partnership has low scalability, it might not be worth it. A few ways to measure this are execution speed, the synergy between the parties, and enthusiasm and respect. In general, if these factors are high, then the partnership might be worth it. Ensure you are measuring them regularly so that you can spot problems early.
Decide the legal partnership type
Choosing the legal business structure of the partnership is another important step. Are you going into a general, limited, or limited liability business partnership? The structure of these three partnership types is different. While the general partnership may not require filing with the state, it offers little liability protection. Meanwhile, one partner in a limited partnership may not have their personal assets tied to the business. In contrast, a limited liability partnership restricts the financial obligation of each partner to the business and offers some protection for all parties.
Have an exit plan
It’s easy to imagine how wonderful things may be in a new enterprise, but preparedness for when things go wrong is crucial. It is normal to guess how an old acquaintance can make an excellent business partner. However, a lot can change over time, and when it is time to make big decisions. Their objectives and interests may shift, and you may find yourself doing all the hard work while sharing all the benefits. At that point, a well-rewritten exit plan can come in handy in ensuring you come out of the situation unscathed. Even in the worst case, you don’t want to lose a friend after dissolving a partnership.
You may have legitimate reasons to enter into a partnership. However, failing to consider the tips like those mentioned above may not only end the partnership abruptly but can cost your business. Therefore, consider everything before jumping into a business relationship.