When two or more people enter into business together with a view to making a profit they automatically form a partnership. Making the decision to embark into a business venture is an exciting position to be in, though each individual involved should understand every aspect of the situation they are entering into.
In order to avoid making the most common mistakes made in partnerships, there are several options that a partner has at their disposal to protect both themselves and the business. For instance it is vital that both partners are aware of where they stand, and having a partnership agreement in place is one sure fire way to protect both parties.
This applies even when you are going into business with someone whom you believe you have an unbreakable bond with, if not more so. Business partnerships can become highly emotional particularly where money is involved, when ego is added to the mix it can often end in disaster and pre-established relationships can suffer badly.
Go in with all the information
1. Partnerships can find themselves in hot water if either partner later discovers something crucial about their business partner that would have affected their initial decision to join forces:
This is key if you intend on entering a general partnerships where both partners will have equal say in the management of the business. Give your partner a small trial task to assess how well you work together and where your strengths lie. Compatibility is crucial and no matter how close your relationship may be socially, starting up in business together can cause tensions to arise.
Alternatively, if the business is to have one partner who provides the financial majority and one partner running the business, it is wise to consider forming a limited partnership containing a general and limited partner. A general partner is responsible for all managerial aspects of the business, including liability for all debts incurred. This protects the limited partner who is only liable for the amount they invested, but prevents them from having a say in the running of the business.
2. Donâ€™t sign an agreement without ensuring that your goals for the business are shared:
Before potential partners hire solicitors to draft their partnership agreement, those involved should know precisely what each otherâ€™s vision is for the future of the business; this should be the same if not very similar.
This should include what you expect one anotherâ€™s roles and responsibilities to be, and how you expect the business to function. For example, by distinguishing at the beginning who does what early on, when it comes to hiring employees it will be clearly established who they should be reporting to in the partnership.
3. Ensure there is an exit strategy in place before you start:
No matter who you enter a business partnership with you wonâ€™t know whatâ€™s going to happen in the future, and what could bring the partnership to an end. This could happen naturally over the course of the venture; one or both partners may wish to retire, a partner might die or choose to leave the business. Whichever way the partnership comes to an end it is vital that each partner is protected.
Without a partnership agreement the business is automatically subject to the laws according to the Partnership Act 1890, which does not allow for a partner to leave the business in any circumstance without having to dissolve it altogether. This leads to complications with clients, finances and other assets if not properly prepared for in a partnership agreement.
Attention to detail
4. Always read the small print:
When starting a business you are often looking at the biggest possible picture; where you imagine the business to be in five years time, what you want to accomplish and how you will achieve it. However, if you have not read the small print from the beginning you are at risk of damaging your future potential.
It is important to know:
- What your partner has stated in the agreement that they expect from the business if the partnership should come to an end
- How much time and work each partner is contributing to the business
- How much capital each partner is investing
- Whether more partners can buy into the business and become an equity partner
- The procedure by which you will resolve problems if things break down: arbitration, litigation or mediation.
5. Donâ€™t underestimate the importance of communication:
Whether you are part of a limited partnership or an LLP, liking one another and having skills that complement each other are valuable assets. Communication in a partnership builds trust that enables your business to grow, this can often mean respecting your partnerâ€™s opinion when they disagree with you.
Maintaining an ongoing dialogue through regular communication helps reduce the risk of any assumptions being made, and encourages all involved to stay focussed on a shared vision. Communicating enables misunderstandings that do arise to be resolved in a swifter and tidier fashion than they might otherwise been.
Speak to Partnership Law specialists
If you are thinking about setting up a business partnership or you are in the process of establishing one; speak to the specialist solicitors at Ralli Partnership Law for legal assistance with your partnership agreement on 0161 832 6131.