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Entering a business partnership can be extremely fulfilling. Sharing your goals with someone who can complement your business may lead to extremely satisfying results. However, this also means that a failed partnership can have detrimental consequences, so you do not rush into forming a business partnership. This article will take you through seven things to consider when forming a business partnership.
Vision
When forming a business partnership, you should consider whether your values align with your business partner’s values. For a business to succeed, business partners need to share similar objectives and long-term goals. Discrepancies in visions for the business have the potential to cause partnership disputes in the long term, which might impact the business.
Trust
The foundation of any relationship is trust and this extends to business relationships. Ensuring you and your business partner can completely trust one another is critical to a successful business partnership. If you doubt your ability to trust your business partner, you may want to rethink the relationship.
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Value
When forming a business partnership, you must consider the value that each business partner will bring to the table. You should ensure that each business partner will contribute to the business long term, be it financially or in skill. If a potential business partner does not contribute anything to sustain the business long-term, you might want to reconsider the partnership.
Expectations
Setting clear expectations at the formation of the business partnership will save you a lot of difficulties in the long run. This includes clearly defining the roles and responsibilities of all business partners from the start, deciding how much time each partner can commit to the business and how business contributions will be measured.
Finances
Ultimately, the purpose of a business is to make a profit. Therefore, you must outline exactly how you plan to manage your business’ finances. This includes discussing with your business partners how much each partner will invest in the business, who will manage the business’s finances and how the business will distribute profits. It is also important to discuss how much profit will be reinvested back into the business. You and your partners may find it advantageous to make a profit share agreement.
Partnership Types
Determining the type of partnership you have is important to consider. There are three main types you may choose from, being general, limited and limited liability partnerships. In a general partnership, each partner has unlimited personal liability for the other partners’ actions, debts, and obligations. In limited partnerships, one general partner assumes full personal liability for the partnership. The law restricts the other partners’ personal liability to the amount of their investment in the business. Finally, limited liability partnerships allow partners to limit their individual responsibility for the acts of the other partners and the debts of the partnership.
Dissolution
Even at the formation stage of a business partnership, you must have an important yet sensitive discussion about how your partnership will be dissolved. For example, you need to consider what happens if one partner wants to leave the partnership, including how they will be compensated. Further, you may wish to consider in which circumstances you will sell the business and how you and your partners will split the proceeds.
Key Takeaways
A successful partnership can be extremely fulfilling. However, depending on how you plan for contingencies, if something goes wrong, it may disrupt your business. This makes it important not to rush into forming a business partnership. Instead, there are a number of things you should carefully consider, including:
- building a shared vision;
- trusting with your business partners;
- affirming similar expectations;
- discussing finances;
- choosing among the different partnership types; and
- planning for dissolution and sale.
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Frequently Asked Questions
A partnership is one type of business structure where two or more parties carry on a business together with the view to make a profit. In a partnership, partners share in the control and management of the business. Partnerships are relatively simple to establish and have minimal reporting requirements compared to other business structures, making them an appealing option for many.
Before forming a business partnership, there are a few key things you will need to consider. This includes ensuring you share a vision with your business partner and trust your business partner. You should also ensure that you have similar expectations about the business management and each will bring sufficient value to the business. You will also want to consider the partnership’s finances, the type of partnership you are entering and how you can dissolve the partnership.
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