Like a bundle of sticks, good business partners support each other and are less likely to crack under strain together than on their own. In fact, companies with multiple owners have a stronger chance of surviving their first five years than sole proprietorships, according to U.S. Small Business Administration data. Some of the common types of business partnerships include: general partnership (GP), limited partnership (LP) and limited liability partnership (LLP), and family limited partnership (FLP).
Yet sole proprietorships are more common than partnerships, making up more than 70 percent of all businesses. That’s because while good partnerships are strong, they can be hard to make.
Here are some elements that good business partnerships require:
Business partnerships need a shared vision. If there are differences in vision, make an honest effort to find compromise. If you want to start a restaurant and your partner envisions a fine dining experience with French cuisine, while you want an American bistro, you are going to be disagreeing over everything from pricing and marketing to hiring and décor.
Different people bring different skills and personalities to a business. There is no stronger glue to hold a business partnership together than when partners need and rely on each other’s abilities. Suppose one person is great at accounting and inventory management, and another is a natural at sales and marketing. Each is free to focus on what they are good at and can appreciate that their partner will pick up the slack in the areas where they are weak.
“This situation provides the opportunity for the partners to assimilate their partner’s strengths and enhance their own skills.” – Rich Middleton, CPA
Before going into business, outline who will have what responsibilities. Agree which things need consensus and which do not. Having this understanding upfront will help resolve future disagreements. Outlining the limits of each person’s role not only avoids conflict, it also identifies where you need to hire outside expertise to fulfill a skill gap in your partnership.
“It’s critical to put a partnership agreement in writing that addresses issues such as profit and loss sharing, contributions and distributions and individual responsibilities.” – Rich Middleton, CPA
Conflict is bound to arise even if the fundamentals of your partnership are strong. Set up a routine for resolving conflicts. Start with a schedule for frequent communication between partners. Allow each person to discuss issues without judgment. If compromise is still difficult after discussion, it helps to have someone who can be a neutral arbiter, such as a trusted employee or consultant.
Create a system to set individual goals as well as business goals. Regularly meet together and set your goals, the steps needed to achieve them, who needs to take the next action, and the expected date of completion.
It’s often easier to get into business with a partner than to exit when it isn’t working out. Create a buy-sell agreement at the start of your business relationship. This should outline how you exit the business and create a fair valuation system to pay the exiting owner. Neither the selling partner nor the buying partner want to feel taken advantage of during an ownership transition.
“When forming a business partnership it is easy to focus on the positive. One thing that is most important is to understand the path moving forward should something happen to the other owners. If there is no plan in place, potentially, you could become business partners with someone that offers no value to the business. At the same time, you may need some cash injection to help keep the business on track should an owner unexpectedly pass away.” – Chris Cicalese, CPA
“Incorporate life insurance in the agreement to facilitate a buy-out in the event of the death of a partner.” – Rich Middleton, CPA
Contact an Alloy Silverstein accountant and advisor today for consulting and guidance when it comes to partnership best practices.
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The information contained in this newsletter is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. For more information or for assistance with any of your tax or business concerns, contact our office at 856.667.4100.
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