A business partnership is when two or more people team up in the ownership and operation of a business. Several large, well-known businesses have started out as successful partnerships (and home-based businesses, as well), including Microsoft's Bill Gates and Paul Allen; the Disney brothers, Walt and Roy; and ice-cream impresarios Ben Cohen and Jerry Greenfield. While these businesses quickly outgrew their original partnership structures — eventually becoming corporations — the combination of the original partners sparked an incredible amount of creativity and energy.
If a partnership works, the business can run like a well-played symphony. If it doesn't work, it's more likely that things will be closer to a catfight or scene from the film Titanic. Unfortunately, you can't really know how things will turn out until a partnership is actually created and the partners begin to work together.
More than a few friendships, families, and personal relationships have been destroyed by partnerships gone bad. Partners can clash in a variety of ways, and these clashes may only occur in a business environment under the pressures of a busy schedule. That's why you should always apply the same standards of care when you decide to partner with family or friends as you would hiring a stranger.
Creating a partnership
In a partnership, each partner commits to providing specific skills, expertise, and effort — and to share the partnership's expenses — in return for an agreed-upon portion of the company's profits. The agreement spelling out these terms is called (not surprisingly) a partnership agreement.
Partnerships take advantage of the different skills, expertise, and resources — including cash — that the different partners bring with them to an organization. On the plus side, partnerships are fairly easy to put together and to administer — all you really need is a simple written agreement, which you can make more complicated if the stakes are high. Be sure, however, to have a lawyer take a look at your partnership agreement before you sign it. Because partners have a legally recognized ownership stake in the business, each is an agent for the partnership and can hire employees, borrow money, and operate the business. Profits are taxed as personal income but, on the minus side of the ledger, partners are personally liable for debts and taxes. Not only that, but personal assets can be confiscated if the partnership can't satisfy creditors' claims. Table 1 shows the advantages and disadvantages in details.
Table 1 Partnership
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The Good News |
The Bad News |
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Partnerships allow you to take advantage of the skills, expertise, efforts of more than one person. |
Partners don't always agree on every course of action; a situation that may eventually become acrimonious and could harm the business. |
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The risks of the business are diffused across one or more partners. |
Each partner is legally liable for actions of the other partners, including hiring employees, borrowing money, operating the business, and more. |
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Partners can provide support to one another and provide a healthy and stimulating social environment. |
Just as in marriage, partners almost always have disagreements and quarrels. |
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The government has little direct control or legislative influence over partnerships. |
Like divorces, when partnerships break up, things can quickly get messy. |
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Expenses are shared by all partners. |
Profits are distributed to all partners. |
In the event that partners want to avoid personal liability, they can form a special legal arrangement available called a limited partnership. Limited partnerships must be registered and must also pay a .
When entering into any partnership, a written agreement that spells out — clearly and unambiguously — the ownership stake of each partner, rights to business proceeds, and his or her responsibilities to the business is absolutely essential. Consider having a lawyer either draft or review your partnership agreement.
Smoothing operations
Following are some tips for ensuring that your partnerships operate smoothly:
- Date first. Before you get married, you want to date for a while first. Not only does this give you time to develop trust and to find out how to communicate with one another, but it allows you to see the good and the bad sides of your partner. Business partnerships work the same way: Get to know your prospective partner well before you tie the knot. Consider doing shared marketing or a specific project together first.
- Partner only with someone you trust. Trust is the glue that holds a partnership together and allows you to achieve great things. Don't even consider — not for one second! — partnering with someone you don't trust.
- Don't partner until you can stand on your own. You should partner from a position of strength, not weakness. Otherwise, your business will become a codependency, and thus dysfunctional. And a dysfunctional company is a company that's going to have problems serving its customers well and making money.
- Enlist partners who add to the business. You don't want a partner who is there just as a source of cash; you want someone who will complement you and bring positive personal value to the company. Just as you should hire employees that shore up your weaknesses, choose partners to cover the skills or connections that you lack.
Follow these tips and your partnerships should be happy ones. If not, you can always split up the partnership and try again, but you'll have a much easier (and more profitable) time by doing your homework and getting it right the first time.