How to Form Good Partnerships
In this article, I define a partnership as “any company where there is more than one owner.” There are two important components in order to form good partnerships:
- Aligning with the right people
- Putting the right formalities around the partnership
Seems simple, right?
Word of warning: You could be in a “de facto partnership” simply by working with someone toward some goal (without even signing anything). Don’t think your entrance or agreement to enter into a partnership starts when you sign paperwork. That couldn’t be further from the truth. Once it can be proven you’re in a “de factor partnership,” it’s almost impossible to withdraw without following the right process under statute. Therefore, you must not agree to do any work nor participate in the furtherance of a business in any way, until you’ve agreed with your partner or partners on the terms, and there is a formal written agreement.
The Right People are Absolutely Critical to Forming Good Partnerships
Before you agree to launch yourself head-first into a business venture with one or more partners, you really owe it to yourself to think about the nature of the relationship. Before you launch into a partnership, treat it like you’re about to get married — treat it that seriously.
- Fit between potential partners? Read our blog article that compares employees to furniture. Instead of employee, substitute for your partner or partners. Is there an alignment with hard skills, soft skills and culture fit? Read more.
- Do any of your potential partners exhibit personality disorders? If so, run away and run away fast. It’s critical that you can negotiate and deal in good faith to resolve problems. If you suspect a potential partner could be a Narcissist, you owe it to yourself to not enter into a partnership with such an individual. It is almost impossible to form good partnerships when a Narcissist is involved. Walking away can be very difficult. One tip: Is one partner demanding a larger stake in the enterprise than the rest of the partners, without a practical reason? If so, you may be dealing with a Narcissist. Read more.
- Are you prepared for the worst? It sounds so pessimistic, but being prepared for the worst-case can spell the difference between wealth and bankruptcy. Read our article, The Gloves are Off – When Business Partners Declare War and our other article, Rogue Business Partners.
- Do you understand the issues with a departing partner? You owe it to yourself to understand the issues and impacts to a business with a partner departs. Read our article, Checklist: How to Deal with a Departing Business Partner, to familiarize yourself with the issues.
- Are all potential partners 110% committed? Finally, are all the partners “on board,” without other commitments, excuses or reservations? It’s critical that all partners are committed, and sharing the same risks if you want to establish good partnerships. Any partner with their foot in some other effort will step out quickly if things are rough (and they will be!), or potentially create problems as the business grows.
If you’ve read the above articles, and you feel there’s a fit between the partners, everyone’s committed, and no one is exhibiting any personality disorders, then you need to put the right “formalities” around the partnership. This means putting an organizational structure around the partnership.
Run the Partnership under a Formal Entity, such as a Limited Liability Company (or LLC)
Once you’ve decided that you do indeed want to enter into a business with one or more people, then you owe it to yourself (and your partners) to put a formal structure around the partnership. Usually, the best (and easiest) way to do this is to form a corporation or LLC, depending on the type of partnership.
Start with reading our blog article, What Did You Get Yourself Into? (Understanding Partnerships). It’s critical you avoid entering into a de facto partnership if you can avoid it. Next, read our blog article, General Considerations When Choosing a Business Structure.
There are tax and other considerations when considering what entity to form. Most partnerships are well served with a limited liability company (or LLC). They are cost-effective, simple to create and easy to manage over the long term. Learn more and order your LLC now.
What’s most important, in creating your formal entity, is thinking through the “partnership agreement.” For a LLC, the “Operating Agreement” serves as that partnership agreement, and there are many issues. Read our blog article, entitled Does Your LLC Have a Proper Operating Agreement? There are many considerations and questions to ask yourself, as well as negotiate with your partners. I call them “edge cases,” where you ask yourself,
What happens if a partner …
- … dies? Does the family of the deceased own the company, or do you buy them out?
- … decides to quit, or simply doesn’t carry their own weight?
- … actually steals from the company, or competes or steals business with a competing company?
- … starts bringing in friends and family to the company, making you feel like an outsider?
What other issues can you envision? All these issues need to be incorporated into the “partnership agreement” and signed by all the partners.
This is where a licensed business attorney can really help put together the right documents, and make sure all the formalities have been properly addressed.