Is a Partnership Right for Your Business?
You scraped and saved to start a business and you are ready to get it up and running. Congrats! Along the way you have also met another business partner who you know will be a perfect fit. Each of you have contributed ideas on forming your partnership, but now both of you are stuck on this question: is a business partnership right for me?
Well we’re glad that you stopped to read this article to find out!
Different Types of Business Partnerships
There are several types of partnerships: limited liability company (LLCs), incorporations, or even sole proprietorships.
A partnership is formed when two or more individuals come together to carry on a trade or business together. Each person contributes money, labour, and skills in return for generating profits.
Part of setting up a business is determining what the structure of the business will be, but first you need to consider the following factors to determine whether a partnership is right for you.
These factors are a bit harder to define, so I am going to explain it in a story about two massage therapists.
The first massage therapist comes from a background where she has a spouse with the primary income, owns her home and has younger kids. We’ll call her partner 1. The second massage therapist is single, has a teenage son and is renting a home. We’ll call her partner 2. They both were able to become massage therapists but their lifestyles were different. Partner 1 had less time to commit to the business because she was the second income earner and had to care for the children. Partner 2 was the only one earning income in her family, thus had to work a large number of hours. This relationship did not work out because of the amount of time they could only commit to the business.
Each partner has different skills that they bring into the business to help earn profits. For instance, partner 1 was really good at the organization of documents for bookkeeping, running payroll, remitting all documents for collecting funds from insurance and running the invoices for clients at the clinic. Partner 2 was not very good at this, however, she was really good at social media, getting clients into the door and an overall community presence. This is a really good relationship for two business partners, but each partner has to recognize the value “that doesn’t get paid” to the business. These responsibilities need to be part of the general partnership agreements. It sets a value to those tasks that do not pay on the hours spent doing it. If you can come up with an agreement on responsibilities, then a partnership is right for you.
Personal Assets and Guarantees
Starting up a small business will require cash or loans for business. Some partners may have access to these funds more easily than the other. The question is what to do with the personal assets that each brings into the business? How to make sure the partner’s contributions are paid back and the contributing partner not held responsible for the loss. During the setup of the massage therapist clinic, partner 1 was able to take out two personal loans needed for the renovation of the business space. She was the guarantor of the loan and if all hell breaks loose, she will be responsible for payment of it. An agreement was not drafted up on what was to be done for the repayment of these loans. Partner 1 took out the interest on the loan each month with an additional $1,000 to start paying it back. Partner 2 felt the other was just taking cash out of the business for herself. As you see this was a messy situation later down the road. If you can come up with an agreement for personal assets, then a partnership is right for you.
During the initial business idea, the “now vision” of how the company operates is always key, but so is the vision of the long term strategy. Talk it over with your potential partners on how the business looks in one year, two years and five-year strategies. Perhaps you might want to keep it as one location and the other partners might envision it as multiple. Profits and losses will also need to be discussed on
1) What each partner’s share is from the profits of the partnership income and
2) How much should be required to stay in the company for growth.
In all, a partnership is a relationship and each person starting a partnership needs to ask those tough questions.
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