Starting a business can be hard, particularly when doing it yourself. Going into business with a partner can minimise the difficulties, particularly when the partners have complimentary skill sets. But what is the best way to structure a business partnership? How should the partnership agreement be documented?
Done well, a good business partnership can lead a business towards long-term profitability, helped along by the cohesion, dedication and combined skill-sets of it’s partners. Done poorly, a partnership can lead to conflicts, inefficiencies, losses and sadly, even the destruction of friendships or marriages.
Few would enter into a marriage without some degree of long-term consideration, planning and discussion. In many ways, a partnership is very similar to a marriage. You have two (or more) persons, committing to each other and to common goals; making decisions together, managing finances together and dealing with difficulties and uncertainties together. So why do so many enter into partnerships with so little forethought?
There are many business structures that you can consider for your partnership. This includes registering a company, a traditional partnership, shareholders, joint venture or through a trust.
For the purposes of this article, we are looking at business partnerships in general. Each business structure is different and you should seek legal and financial advice on which structure is best for you, as they are all legally dealt with differently.
When deciding to enter into a business partnership, the following items should be considered:
- Business structure, roles and decision making
You and your business partner should consider (and discuss with both your legal and financial advisors) which business structure is most suitable for your business. You should also discuss with your business partner what roles each partner would assume, including delegating management responsibilities, setting expectations and determining how decisions will be made.
- Salary or payments
It is important to determine your partnership’s remuneration and distributions policy up-front. This is often determined by each partner’s percentage of ownership of the business. Some partnerships may also wish to allow for additional bonuses or incentive schemes, which will fall outside this scope. You should clearly establish and document your partnership’s agreed definition of a “profit”, so that it’s clear what each business partner would receive from such profit and when.
- Exit Strategies
Disputes commonly arise between business partners where one partner wants to sell the business or ‘cash-out’ and the remaining partner does not. It is therefore very important that you consider, establish and implement into the contract, the conditions on which a partner may leave the business partnership and how. Should any disputes arise within the partnership, the contract needs to detail how these disputes are to be dealt with through the formulation of a dispute-resolution process. This process may include referring the dispute to mediation or arbitration. This type of alternative dispute resolution could save you and your business partner’s time and money by quickly resolving the matter.
A successful partnership should consider the potential risks and aim to mitigate these early on. One of the best ways to minimise the risks when forming a business partnership, is to create a contract.
Many people consider contracts as something scary or unnecessary. Perhaps one partner does not want to offend the other or lead the other partner to assume that they don’t trust them. Instead of viewing contracts in this way, consider that you are simply acting professionally and reaching an agreement that both sides clearly understand.
There is also the issue of “oral agreements” and although they may seem concrete at the time, they often lead to problems in the future, particularly where there are misunderstandings between the partners.
So if you value the existing relationship that you have with your business partner, you need a formal contract.
A contract detailing the above considerations should ensure that all parties understand their role within the business, their financial entitlements as a partner and should help to minimise the risk of disputes and disagreements long into the future.
If you are thinking of entering into a partnership, insist on a contract. It will demonstrate your professionalism and dedication to the business venture and should also improve the partners’ relationship with each other, while protecting all those with an interest in the long term. It’s always better to have a discussion today, than a dispute tomorrow.
Should you need any assistance with a contract for your business, please do not hesitate to contact us on (02) 9523 5535.