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Salt Lake City Bookkeeping Blog

Read This to Avoid the Most Common Business Partnership Mistakes!

Posted by Leanne Armstrong on Jan 3, 2018 9:00:00 AM

Read This to Avoid the Most Common Business Partnership Mistakes If you believe that the best way to navigate the ups and downs of that new business venture is with a trusty partner by your side, do yourself a favor and read this first.

The right business partnership can be professionally satisfying and extremely lucrative. But like any relationship, working with a business partner successfully over the long term means going in prepared and with the proper groundwork in place. Here are some common partnership mistakes you’ll want to steer clear of.

Ignoring the Lack of a Shared Vision

Starting a business is exciting. So exciting in fact, that many entrepreneurs overlook potential incompatibilities with their new business partner.

Where you see your business going in the future – and how you see it getting there – are part of the vision that will drive its success. Make sure you and your partner are on the same page when it comes to your plan of action and how business decisions will ultimately be handled.

You should determine in advance:

  • whether to equally share ownership of and authority over your business,
  • how to establish company voting rights, and
  • whether to give a small ownership percentage to a third partner for tie-breaking purposes in the event of a disagreement

As the lifeblood of your growing company, you and your partner should also be in complete agreement where your approach to customer service is concerned.

Pursuing the Wrong Partnership Structure

It’s important to recognize that sharing ownership and profits with a partner constitutes a legal form of business operation. There are several types of partnership structures, but the two most common are limited and general partnerships.

In most cases where you and somebody else start a business together, it’s considered a general partnership unless otherwise agreed. A general partnership:

  • is easier to set up than a limited partnership,
  • includes two or more actively involved partners, and
  • is the least complex choice for companies without passive investors

As a general partner, you’ll not only co-manage your business, you’ll assume an ownership role that includes responsibility for its assets, debts, profits, and taxes. Limited partners typically serve as investors only, with no real control over your company.

Not Seeking Legal Advice

Understanding your legal obligations and liabilities as a business partner is essential before you enter into an agreement. As we’ve seen, general business partners need to be prepared for a certain amount of shared financial accountability. Especially since both you and your partner will have the right to act on behalf of your company - and that includes activities like taking out loans.

Seeking legal advice and setting your partnership up correctly will help mitigate relationship tension that could harm your business. And starting off on the right foot where your legal work is concerned is not only smart, it’s a better indicator of future success.

While many aspiring entrepreneurs choose to put their limited capital toward marketing and product development, the fact is that investing in legal expertise can save you and your partner significant stress and money down the road.

Skipping the Written Agreement

Going into business with a partner – but without a partnership agreement – is probably the biggest mistake you can make as a new business owner. A written business partnership agreement not only allows you to make the most of your combined skills and capital, it clarifies the parameters of your professional relationship.

Mapping out your business arrangement is best done with the help of a qualified small business lawyer, and will typically address such elements as:

  • the purpose of your business,
  • the tasks and responsibilities of each partner,
  • how business decisions will be made,
  • how disputes will be resolved,
  • the division of income, and
  • how changes to the partnership structure – including a buyout – will be handled

If you and your partner plan to seek financing, be sure to have your business agreement drawn up before you approach potential lenders or investors.

Failing to Consider an Exit Strategy

Every business owner must leave their empire behind eventually. But what happens if you and your partner have different views on when that day has arrived? Even more challenging are business partnerships that take a turn for the worse and end in legal disputes and dissolution.

Your partnership agreement should answer specific questions about what will happen when either party wants to leave the business. For example:

  • Who will a partner be permitted to sell their business interest to?
  • How will each partner’s interest be valued?
  • How and when will a partner be paid out if they choose to give up their interest?
  • What happens to a partner’s interest if they become incapacitated?

Having these details ironed out in advance will also make it easier should you decide together to sell your business to somebody else.

Working with a business partner inevitably increases the risk of conflict. To protect yourself, your family, and your investment, you should avoid entering into any partnership without a legal contract. And don’t forget to seek professional advice where nondisclosures, non-competes, and power of attorney agreements are concerned.

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Topics: Equity Partner, Growth Coach, business partnership