Occasionally, two friends or a couple may consider embarking on a business venture. The first question to consider is who will be in charge. This can be a control issue as business can seem to be based on more of a dictatorship than a democracy.
In a recent article in Forbes, contributor Jim Blasingame put it this way: “A business can be like a dictatorship in that an individual will likely make the final decision. One desk, as President Truman so famously said, where the proverbial buck stops. But here’s another irony: Even though a business may have characteristics of a dictatorship, it likely won’t be successful if the team is managed by a tyrant.” This is where a partnership can have challenges that a sole proprietor may not have to consider. Picking the right partner and sorting through roles and responsibilities and working styles up front will help ensure success down the road. As Scott Gerber advised in Entrepreneur, “Communication is the key to a successful partnership. Find a collaborator, not a dictator. No one is always right.”
When looking at a general partnership structurally, it is basically two or more individual sole proprietors working in a business as one. Challenges to consider centre on decision-making and liability.
The first consideration is that an agreement or contract needs to be in force. This can be equated to a marriage. When married, each partner or spouse is liable for the actions of the other. This applies to a business partnership as well. Examples of sample partnership documents are available at the Halton Small Business Centre. You can also check out an online sample template document on the MaRS Innovation Centre website. Make sure you employ the services of a good lawyer to help you finalize your agreement.
Besides the liability, other considerations are necessary, such as:
- Who will be responsible for what roles?
- How will any profits/income be distributed based on each partner’s equity position?
- How long with the agreement be in effect?
- How will the partnership be dissolved and the other partner paid out?
Terms and conditions can be difficult and at first glance this discussion may appear to be a daunting task; however, having these difficult discussions before starting the partnership will certainly help to define what each partner does as well as provide a good understanding of what is to be expected. It is better to know these things before, rather than wait for them to happen and be forced to react. Avoid extra stress and the chance you’ll need to jump off a sinking ship. To boost your chances of success, know your partner well before you sign on as partners and ensure you have the appropriate legal documentation in place.
The Small Business Consultants at the Halton Region Small Business Centre offer free one-on-one consultations to help entrepreneurs establish and grow their businesses. Dial 311 or call 905-825-6000, ext. 7900 to make your appointment. Check out our calendar of upcoming seminars, including Starting a Small Business and follow us on Twitter for tips. Ask us about our Access to Professionals program.