No matter how you slice it, starting a business can be scary. So it’s no wonder that often, when people decide to make the leap and go out on their own, they try to find someone to do it with them. Business partners! What a great idea, let’s cut the risk in half, make sure we’re never lonely and chain ourselves more permanently to another person than is possible in any other way. Oh wait, did that last part sound not so great? Well….good. Business partnerships can sometimes lead to great things, but more often than not, they lead to additional expenses, headaches and issues. However, many of the risks can be minimized, and a small amount of planning can often make all the difference. So what are the most important things to know if you’re thinking about partnering for your venture?
- You Don’t Actually Want a Partnership – You may have found a person (or persons) that you want to be in business with, but please, do NOT refer to what you have as a partnership.* Why? Because a partnership, from a legal standpoint, is a particular type of entity where each person is completely responsible for all of the actions of the other partners. So, while you may want to go into business with someone, what you want to create is a limited liability company, corporation or some other type of entity that will allow the founders to limit their liability in certain ways.
- Figure Out What’s Fair – Often when people decide to go into business together, they decide to split the ownership by dividing 100 by the number of founders. Two founders? 50/50, Three? 1/3 for each. Four? 25% a piece. But is this fair? Will each of the owners be putting in comparable amounts of start-up capital, or sweat equity, or assuming the same risk when guaranteeing amounts the company might borrow? It’s important to consider these things, and to figure out what a FAIR distribution of ownership is, before the business begins.
- Assume the Worst, and Document It. – Not everyone who enters into a marriage needs/wants a pre-nuptial agreement. But everyone who enters into a business marriage (which is truly what starting a business with someone else is) NEEDS a documented plan for the “what ifs.” What if one of you dies? What if one of you becomes disabled and can’t work? What if someone decides they don’t want to be a business owner anymore or what if you just can’t find a way to agree on a crucial business decision? Buy-sell and member control agreements are the documents to answer these questions, and should likely be one of the first items on your company to-do list. And take it from us, it’s much easier to agree about “what should happen if” before it happens.
So is starting a business a scary proposition? Yes, in many ways it can be. And doing it with someone else may help alleviate some of that scariness. But if you decide that’s the path for you, make sure you get certain things clear right away. Some of these topics may be difficult to bring up, but if you aren’t ready to have tough conversations, then owning a business with someone else might REALLY not be for you.
*One caveat, your accountant may well refer to your business structure as a partnership, because that may be what it is for tax purposes. This is completely acceptable, and entirely separate from your company’s legal structure.