Small Business Partnership

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Many small businesses begin when friends or co-workers decide to get together and start their own company. My first business began as a partnership with a coworker and a friend.

Small business partnerships are a powerful way to get started in your own business. It’s a natural way to expand your capabilities, add diversification to your sales and service efforts, and have an instant, entrepreneur support network.

As business structures go, small business partnerships are easier to set up and get started than a corporation. They require less paperwork, they're less expensive to set up and administer.

With that said, eventually I opted to incorporate my companies. My main reason for incorporating was the limited liability provided by incorporating. (More reasons here.)

But back to partnerships. They can work well but they can also get tricky. My #1 piece of advice is...

To make sure they run smoothly, create a contract.

You know the old saying that a partnership is like a marriage? It’s absolutely true. Starting a business partnership is all fun and games before people actually commit their money and all their free time to work together. As partners, you will quickly find out about each others’ idiosyncrasies and work habits, decision making, and priorities. In this situation, the differences become very clear and with everything at stake it can get contentious.

In your contract, explicitly identify each partner’s responsibilities and other important facts such as how to handle disputes. My best advice is for you to proceed with the knowledge that memory is imperfect and you will not want any misunderstandings between the partners regarding your agreement later on.

Misunderstandings between partners are the main risk of going into business with other people. (Of course this applies to all business structures where you have to share ownership with others.) It's not like anybody purposely does anything wrong; disputes are just bound to arise due to differences of opinion or recall. A written contract helps keep the peace.

Things to Include:

• Ownership Percentages – This will reflect the allocation of profit unless some other agreement is reached that stipulates profit allocation specifically. Also, if the investment will be paid back be absolutely sure to indicate how, when, and under what circumstances this will occur (i.e. Before distributing ANY profits? According to some success schedule?)

• What Each Partner Will Contribute - Some partners will bring things other than money. Perhaps they have killer technical skills and are essential to developing a product. Or maybe, they own a building from which you intend to operate. Or even better, they have a client relationship that will lead to your first and/or a big sale.

• Buy/Sell agreement – This is an understanding of how someone can be bought out by the other partners. Often times a valuation will be stipulated for this to occur. An idea that I have used in this regard is a clause called “Chicken.” Under chicken, if you want to buy out another partner out for any reason you simply offer that person a dollar amount. That person is free to either take that money or buy you out for the same amount of money.

• Partner Duties - You may want to specifically identify what each person will be responsible for or at least, "primary" duties.

Other Small Business Partnership Contract Considerations:

• Even Steven - I don't recommend equal small business partnerships such as 50/50 between two or 33/33/33 between three, etc. The reason is that there is nobody who can break stalemated decisions. Even little decisions can become problematic in this situation.

  But I realize that many partnerships will not get started unless everyone feels equal so if that’s the case you will have to live with it.

• Married Partners - If a business partner is married (or gets married), you need to consider the fact that the spouse is part of your partnership agreement. In most states, that partner needs to sign onto agreements at a minimum. I’ve heard of situations where a partner gets divorced and the spouse forces a dissolution of the business in order to get compensated for a share of the value. (I'm all for marriage other than that ;)

• Different Opinions - You can have different ideas over everything from big picture stuff to minute details. How you want to run the company? How much you want to work? How do you manage employees? How often you want to take vacation time?

• Different Financial Situations – This can affect the need to earn a living out of the business rather than rolling any cashflow back into the business. Imagine if your business partner is independently wealthy or has a working spouse and you don’t?

• Different Home Lives - What should happen in the event of one partner getting divorced or having financial difficulty (like personal bankruptcy)? What if one person's spouse is less understanding about work commitments than another spouse? All these things will impact your success and are best discussed early-on.

Great small business partnerships can occur with the dynamics of many talented and dedicated people. Just be smart about getting your understandings down in writing, as far in advance as possible!

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