How to Start a Small Business with a Partner

Having a partner with whom you can start a small business can be exciting and rewarding. It allows entrepreneurs to combine their skills, resources, and expertise to create a successful enterprise. This collaborative approach often leads to increased creativity, shared responsibilities, and improved decision-making processes.

There are several essential steps to follow when starting a small business with a partner. With these guidelines, aspiring entrepreneurs can hopefully lay a solid foundation for their joint business venture.

Choose the Right Business Structure

When starting a small business with a partner, selecting the appropriate business structure is crucial. This decision has an impact on various aspects of the business, including liability, taxes, and management responsibilities. Three common partnership structures to consider are general partnerships, limited partnerships, and limited liability partnerships.

General Partnership

A general partnership is the simplest form of partnership. In this structure, two or more individuals share equal responsibility and rights in the business. All partners have unlimited liability for the company’s debts and obligations.

This means that creditors can pursue the personal assets of any partner to satisfy business debts. General partnerships are easy to establish and require minimal paperwork. However, they offer no personal liability protection, which can be risky for the partners involved.

Limited Partnership

A limited partnership consists of at least one general partner and one or more limited partners. The general partner manages the business and has unlimited liability, while limited partners are typically passive investors with limited liability.

The amount limited partners invest in the business restricts their financial risk. Businesses often use this structure for special situations or short-term projects like real estate investments or film productions.

Limited Liability Partnership

A limited liability partnership (LLP) provides personal asset protection for all partners. Professional service businesses like law firms or accounting practices benefit from this structure. An LLP shields partners from personal liability for other partners’ actions and the business’s debts.

However, they remain liable for their own professional malpractice. LLPs are not available in all states and may have specific requirements for formation and operation.

Draft a Comprehensive Partnership Agreement

A comprehensive partnership agreement is essential when starting a small business with a partner. This document outlines specific business practices and establishes rules for managing responsibilities, ownership, investments, profits, losses, and company management. It helps answer “What happens if…” questions before they arise, ensuring smooth business operations.

Roles and Responsibilities

Defining roles and responsibilities is crucial to avoid misunderstandings and conflicts. The agreement should clearly establish each partner’s functions and obligations, fostering a harmonious and productive collaborative environment.

It’s important to articulate specific tasks or duties that each partner must fulfill, aligning them with defined roles. This clarity ensures that each partner knows what is expected, reducing the chance of friction and facilitating synergy necessary for the partnership’s success.

Profit Sharing

The agreement must address how profits and losses will be divided among partners. This can be based on each partner’s percentage of ownership in the business or through a different arrangement, such as an equal split regardless of ownership interest.

The agreement should also specify if partners will be allowed to take “draws,” which are advance payments of profits made to partners on a regular basis with no withholding requirements.

Decision-Making Process

To avoid gridlock and arguments, the agreement should lay out procedures for decision-making. This is critical to running a successful partnership. Partners need to understand that they cannot be involved in every decision, but should be supportive of management while avoiding undermining decision-making processes.

The agreement should specify decision-making processes, whether by consensus, democracy, or delegation to specific partners or committees.

Establish Clear Financial Arrangements

When starting a small business with a partner, establishing clear financial arrangements is crucial for the partnership’s success. This involves determining initial capital contributions, ongoing financial obligations, and profit distribution methods.

Initial Capital Contributions

Partners must decide on the amount and form of initial investments. You can make these contributions in cash, property, or services. The partnership agreement should clearly define what constitutes a valid contribution and how it will be valued.

For example, if one partner contributes USD 50,000 in cash while another provides equipment worth USD 50,000, both would constitute equal contributions.

Ongoing Financial Obligations

As the business grows, additional funding may be necessary. Partners should discuss and agree upon their financial responsibilities beyond the initial investment. This may include setting guidelines for additional capital injections or personal guarantees for business loans.

Regular reviews of the partnership’s financial needs help determine if extra contributions are required.

Profit Distribution Method

Deciding profit-sharing is crucial. Partners can split profits equally or based on contributions and responsibilities. Operational partners may receive more profits than silent partners, reflecting each one’s investment, risk, and involvement.

It’s essential to document these financial arrangements in the partnership agreement to avoid future conflicts. By establishing clear guidelines for capital contributions, ongoing obligations, and profit sharing, partners can ensure a fair and transparent financial foundation for their small business venture.

Plan for the Future and Potential Challenges

When starting a small business with a partner, it’s crucial to plan for the future and anticipate potential challenges. This foresight can help partners navigate obstacles and ensure long-term success.

Exit Strategy

Developing an exit strategy is essential when starting a small business with a partner. Partners should discuss and agree upon how they will handle situations where one partner wants to leave the business. This may involve establishing a process for selling the business or buying out a partner.

It’s important to determine how the value of a partner’s equity will be calculated and whether a partner who invests more capital will receive a proportionately higher payout. Including these details in the partnership agreement can prevent conflicts and ensure a smooth transition if a partner decides to exit.

Dispute Resolution

Even well-intentioned partnerships can encounter disputes that threaten the harmony and success of the venture. To address potential conflicts, partners should establish clear communication channels and a dispute resolution mechanism.

This may involve appointing a third-party mediator or forming an advisory board to provide guidance and help resolve conflicts. By having these procedures in place, partners can address issues promptly and effectively, protecting the partnership’s interests and maintaining a productive working relationship.

Business Growth Plans

As the business grows, partners should plan for future capital needs and expansion strategies. Decide on funding sources, like reinvestment, loans, or external investors. Discuss how varying capital contributions might affect ownership stakes.

Additionally, partners should develop a comprehensive business plan that outlines specific outcomes and commitments from both parties, fostering mutual accountability and clarity in partnership objectives.

Having a partner can be a game-changer for entrepreneurs looking to combine their strengths and resources. By carefully choosing the right business structure, drafting a solid partnership agreement, and establishing clear financial arrangements, partners can lay the groundwork for a successful venture. What’s more, planning for future challenges and potential exits helps ensure the long-term viability of the partnership.

FAQs

Is starting a business with a partner a good idea?

Starting a business with a partner can be beneficial, offering diverse skills and shared responsibilities. However, clear communication and defined roles are essential to avoid conflicts and ensure smooth collaboration.

How does a 70/30 partnership work?

In a 70/30 partnership, one partner holds a 70% ownership stake and the other 30%. Profits, losses, and decision-making power are typically divided according to these percentages, reflecting each partner’s investment and contribution.

Can couples start a business together?

Yes, couples can successfully start a business together. The key is to establish clear boundaries, maintain open communication, and balance personal and professional lives to avoid strain on their relationship.

Is partnership good for a small business?

Partnerships can be advantageous for small businesses, providing complementary skills and shared financial responsibility. Success hinges on mutual trust, clear agreements, and aligned goals to ensure a productive and harmonious working relationship.