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Forming a business partnership can be extremely fulfilling. This is because it allows you to work with another person who shares your commercial goals and can complement your business. However, when partnerships do not go smoothly, it can have detrimental consequences on the business. Therefore, it is important that you do not rush into forming a business partnership. This article will take you through seven things to consider when forming a business partnership. 

1. Vision

When forming a business partnership, you must consider whether your values align with your business partner’s values. For a business to succeed, business partners need to have similar objectives and long term goals. Discrepancies in visions for the business can cause disputes in the long term, which might impact the business. 

2. Trust

The foundation of any relationship is trust. This principle also extends to business relationships. Therefore, ensuring you and your business partner can completely trust one another is critical to a successful business partnership. If you have doubts about your ability to trust your business partner, you may want to rethink the relationship.

3. Value

When forming a business partnership, you must consider what each partner can bring to the table. You should ensure that each business partner will add value to the business in the long term, be it in terms of the business’ finance or the partner’s skills. If you do not believe that your potential business partner will contribute anything beneficial for the business in the long run, you may want to reconsider the partnership.

4. Expectations

Setting clear expectations at the formation of the business partnership will save you a lot of difficulties later. Expectation setting 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 you will measure business contributions. 

5. Finances

Ultimately, the purpose of a business is to make a profit. Therefore, it is important that you 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. Additionally, you should discuss how you will manage the business’ finances and distribute profits. It is also essential to discuss how much profit will be reinvested back into the business.

6. Partnership Types

Another consideration before forming a business partnership is the kind of partnership structure you will use. There are three main types you may choose from, being:

  • general;
  • limited; and
  • limited liability partnerships.

The three main partnership types are discussed in the table below:

Partnership TypeExplanation
General partnershipEach partner has unlimited personal liability for the other partners’ actions, debts, and obligations.
Limited partnershipIn limited partnerships, one general partner assumes full personal liability of the partnership. Additionally, the other partners restrict their personal liability to the amount of their share or investment in the business.
Limited liability partnershipFinally, limited liability partnerships allow partners to limit their individual responsibility for the acts of the other partners and the debts of the partnership.

7. Dissolution

Even at the formation stage of a business partnership, you must have an important yet sensitive discussion about how you will eventually dissolve your partnership.

For example, you need to consider what happens if one partner wants to leave the partnership. This includes determining how will they be compensated. Furthermore, if you wish to sell the business, you will need to consider the circumstances in which you will be able to do so and how the profits of the sale will be split.

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Key Takeaways

A successful partnership can be extremely fulfilling. However, if something goes wrong, your business will suffer. This is why you should not rush into forming a business partnership. Instead, there are a number of things you should carefully consider, including:

  • shared vision;
  • trust with your business partner;
  • similar expectations;
  • finances;
  • partnership types; and
  • dissolution methods.

If you need assistance forming a business partnership, LegalVision’s experienced business lawyers can help. You can contact them on 1300 544 755 or by filling out the form on this page.

Frequently Asked Questions 

What is a partnership?

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.

What do I need to consider before forming a business partnership?

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 management of the business and will each 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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