A partnership allows you to share the expense, responsibility, and time commitment of starting a new business. A strong partnership lets two entrepreneurs combine their skills and knowledge to build a stronger business than either partner could alone.
This doesn’t mean partnerships are a guarantee of success, however. Like other forms of business startups, partnerships have a high failure rate, with an estimated 70% eventually dissolving over time. Choosing the right partner from the start can help you avoid becoming one of those statistics, and following these 7 steps will help you to do so.
1. Ensure you’re professionally compatible.
Just because two people get along well as friends doesn’t mean they’ll be successful together in a business partnership. Assessing your professional compatibility before you decide to go into business together can help ensure that you’re set up for success.
There are several factors that influence the professional compatibility of two partners:
- Strengths and weaknesses. You don’t necessarily want a partner who’s a mirror image of yourself. Instead, the most successful partners have complementary skill sets, with each possessing strengths in areas to fill in for the other’s weaknesses.
- If you and your partner have drastically different core values it will be hard to choose a course of action when you have to make a difficult decision. A shared set of values provides a solid foundation for your eventual business identity.
- Work and communication styles. You won’t necessarily always work side-by-side as partners, but you do need to be able to collaborate effectively. That’s much easier if both partners work and communicate in similar ways.
- Risk tolerance. There is always an element of risk with opening a business, but some people are comfortable taking bigger risks than others. Knowing each other’s risk tolerance can help you assess whether you’ll be on the same page when you’re deciding which opportunities to pursue as you grow your business.
- Financial health. You want to trust that your business’ finances are in good hands. If someone has a history of mismanaging their personal finances, you may want to think twice about entering into a business partnership with them, or take extra precautions to protect your business assets if you do.
2. Set clear expectations and boundaries.
For a partnership to function successfully, it’s essential that both parties understand their specific role, responsibilities, and rights within the business. Establishing expectations helps create a fair, equal partnership where both people are prepared to take accountability for their share of the risk and work.
Boundaries are important between any business partners, but often especially so when you’re also family or friends outside of the business. In this case, it’s important to delineate where your professional relationship ends and your personal relationship starts. This can help prevent them from bleeding into each other and makes it easier for both parties to maintain their friendship and their work/life balance when things in the business go wrong or get difficult.
Clarify in writing each partner’s expected time and financial commitment. Along with this, outline in detail which areas of the business each partner will be primarily accountable for and how you’ll track and measure each partner’s contributions. You may find it helpful to create a job description for each partner. This can also be beneficial if a partner wants to leave the business down the line, clarifying what additional duties the remaining partner needs to take on, or the skills and capabilities they should look for in a replacement.
3. Decide on your legal partnership structure.
There are three main types of partnership that you can choose from:
- General partnership – The basic common law form of partnership, a general partnership is created by an agreement between the parties rather than an official legal filing. The advantage of this is that it’s easy to create with few ongoing requirements and no formation filing fees, state fees, or franchise taxes. The disadvantage is that it provides little liability protection to either partner.
- Limited partnership – In this structure, the general partner is responsible for daily operations and has full liability, while the limited partner has no liability or responsibilities in daily operations. This arrangement is common when one party is primarily an investor who isn’t interested in running the business.
- Limited liability partnership (LLP) – LLPs can only be formed for certain types of professional services, such as attorneys, doctors, or accountants, as defined by state law. Both partners have limited liability, meaning their personal assets cannot be used to satisfy business debts, and this is the main advantage of this structure. The disadvantage is that it’s more costly and time consuming to form with more ongoing fees and requirements.
The right legal structure for your partnership will depend on your industry, the responsibility and liability each partner is willing to accept, and what each partner will contribute to the business.
4. Collaborate to set your business goals.
When partners have different priorities it leaves the door open for potential conflict down the line. Your big-picture business goals will determine where you allocate your resources and devote your time, as well as which risks you’re willing to take and which opportunities you’ll be most committed to pursuing.
It’s smart to set both short- and long-term goals before you embark on a partnership. Short-term goals need to be actionable and achievable within a deadline that’s measured in weeks or months. They have defined targets and a metric by which to track them.
Long-term goals are strategic and high-level. While they may involve defined targets, such as a long-term revenue goal, they may also be more abstract and derived from the business’ values and vision. The short-term goals you set for your business are your means of working toward and achieving your long-term goals, so you’ll need both in a successful partnership.
5. Establish communication and workload management systems.
Having the right systems in place from the start of your business will help prevent issues down the line. Determine how you’ll keep track of your clients, inventory, workload, finances, and other key areas of the business, as well as how you’ll communicate with each other, your customers, and any employees, vendors, or other professionals your business will need.
6. Plan for how you’ll manage a dissolution or exit strategy.
Even an ideal business partnership isn’t guaranteed to last forever. While it can be uncomfortable to talk about the end of a business before it even starts, taking the time to discuss how you’ll handle potential scenarios gives both your business and your personal relationship the best chance of surviving a partner’s exit should it happen.
7. Consult with an attorney to make your agreement official.
Once you know what partnership structure you’ll use and each party’s role within the business, put it in writing. Relying on a verbal agreement can open up the possibility of misunderstandings and conflicts that can be easily prevented by having an official, legal document. Meeting with a business attorney also ensures you’re not missing any key steps, systems, or knowledge that you’ll need as the business grows.
