7 Things to Know Before Entering a Small Business Partnership

Successfully running a business partnership can be complicated, as there are lots of things to consider when operating a business with another person. There are many critical decisions to make, and you should make as many of them as possible before you enter a partnership and start running a business with someone else.

It’s important for you and your potential partner to spell out the details of the partnership and to be prepared for such issues as sharing management duties, making decisions and withdrawing from the partnership. These things can be outlined in a partnership agreement, which lays out the terms and conditions of the relationship between the partners and helps your business manage conflicts appropriately.

Of course, when choosing someone to be your partner, you need to ask yourself if you trust this person and if you share his or her goals and values. Important decisions will need to be made that affect not only the business itself but also each partner’s finances as well. In the simplest terms, it is crucial to fully trust and understand your potential partner.

Once you’ve found a trustworthy partner and are ready to start the process of forming your partnership, the following key items will need to be addressed:

1. Contributions

Determine who will contribute cash, property, materials, etc. for the startup of the business. Will you split the costs 50/50? Or can one person afford to shoulder more of the financial burden? Also, how will these contributions affect the percentage of ownership for each partner? Sorting out duties and ownership beforehand can save both partners from any lawsuits arising out of future disputes.

2. Allocations

Another important thing to decide in the first stages is the division of ownership and profits and losses. Ownership may be tied to contributions made, or you may both decide that 50% each works for you. Decide when profits will be distributed, whether that is immediately upon making money or if you will wait a bit to first pay off bills. Be sure to consider each partner’s financial needs.

3. Authority and Decision Making

Authority is often tied to ownership percentages, but not always. Be sure that you determine how decisions will be made, whether they’re based on the size of an ownership stake or some other criteria. Does each partner have the ability to bind the partnership? Also, will you be voting on major or minor decisions? What constitutes a major or minor decision? Will you let each partner make decisions on their own? Do you need to consult each other before taking any action? All of these questions should be laid to rest as soon as possible.

4. Dispute Resolution

Decide what will happen if the two of you are deadlocked on a decision. Will you immediately head to court? Or will you consider alternatives to traditional dispute resolution?

5. Division of Labor

When determining how the labor will be split, consider the skills of each partner. Is one of you detail-oriented, while the other is an overall-picture thinker? Take this into account when assigning duties. Decide who will supervise employees, negotiate with vendors, take care of bookkeeping, take charge of customer service and more. Cooperation is needed, so be sure to divide all of the roles and responsibilities according to ability and competency. This will help avoid confusion and make sure that all priorities get addressed effectively.

6. Withdrawal

Be prepared with a buyout plan and exit clauses. There may be a time when one partner needs to leave, such as in the case of divorce, retirement, death or even a decision to quit the business. Will the other partner be required to buyout the other? Also, consider what you will do in the case of dissolution if you both want to leave. Will you liquidate and divide your assets?

7. Additional Partners

Later in the partnership, new partners, such as spouses or children, may want to join the business. Have a procedure for admitting new partners if you decide you want to or are willing to do so.

As mentioned earlier, you should put the answers to these questions in writing as part of your partnership agreement. Doing so will allow all partners to avoid any unpleasant consequences that might arise from a dispute. Besides, if you and your partner can agree on how to address major questions like this early on, then that’s a strong sign that the partnership is a good one.


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