Things to Consider When Forming a Partnership

The company you keep is the company you make. 

Owning your own business is exciting and rewarding but you may want help in operating or growing it by taking on a partner or partners. Before you do form a partnership, however, there are some things to consider.A partnership is often compared to a marriage; like most marriages, there are good times and bad. So, picking the right partner for you and your business is essential if you want to be successful. Ask yourself the following questions when considering a partner:Are you looking for a manager, investor, or someone with connections who can help expand the business? Do you really need a partner or just someone who can take over some of the operations without having a stake in it? If you lack sufficient capital or are relying on someone else’s connections, you are risking future power struggles.Have you taken the time to get to know your potential partner to the point you feel like you could work with them – in good times and bad?  If you feel this candidate is annoying or you have little in common with them, then find another candidate.If your candidate has substantial obligations, spending, or other risky ventures, think twice about whether you want this individual as a partner. This might mean filling in when employees are ill or fail to show up, spending time on the books, or actively marketing the business, among others. Do your due diligence and see if your candidate had trouble meeting obligations, was the subject of employee complaints (sexual harassment or wage and hour violations), or has had failed business ventures.  You can start your digging online (for example, many states provide online public access to court records, ), but don’t be afraid to take it a step further and ask for personal or business references if you’re just getting to know the candidate.You will want a thorough and comprehensive partnership agreement drawn up, or reviewed by, your attorney.  This agreement should outline roles, the percentage of the business, and other matters. If he or she balks at having your attorney draft or review the agreement, then look elsewhere. You have always been told to “put it in writing.” Having a written agreement is essential when forming a business relationship.  A poorly drafted agreement, however, will only create more problems than no agreement, so have an experienced business law attorney draft the agreement for you.

You will want the agreement to address some basic issues:

  • The percentage of ownership. Is a 50-50 split fair depending on investment amount and what duties or time the partners will be devoted to the business? If you are working full-time and the other partner is just introducing persons as investors or only putting in a few hours a day, then the percentage should reflect this.
  • Profit and loss allocation. Most profits and losses are allocated on ownership percentage, but they don’t have to be.
  • Name a manager. Decide who will make decisions regarding the daily operation of the business. Also, define the roles and obligations of each partner.
  • Binding the partnership. A partner can bind the company to an obligation without the knowledge or consent of other partners. Include a provision indicating what kind of consent is needed before any partner ties the business to an obligation so you do not become liable for obligations you are unaware of or do not want.
  • Mediation. Consider including a provision in your partnership agreement requiring mediation if there is a stalemate over certain major business decisions or the interpretation of a clause in the written agreement. You can have trained mediator in business matters named in advance for this purpose.
  • Death, disability or sale. No one lives forever, and accidents or illness can incapacitate a partner. A partner may also want to retire, move on, or leave his or her interest to someone by will. Your Agreement should address a method or process for sale or buyout, including a method of valuation in those instances.
Once you have decided if you want to take on a partner, you should also consider what type of business entity best fits your goals.

Discuss this with a business attorney who can advise you on the benefits and drawbacks of a partnership and whether this is the right course of action. Disclaimer: The information contained in this post is for general informational purposes only and is not legal advice. Due to the rapidly changing nature of law, Schloemer Law Firm makes no warranty or guarantee concerning the accuracy or completeness of this content. You should consult with an attorney to review the current status of the law and how it applies to your unique circumstances before deciding to take—or refrain from taking—any action.  If you need legal guidance, please contact us at 262-334-3471 or [email protected]