Marriages of Convenience

These days, when budgets are tight and credit is often harder to attain, you may only be able to start a business if you can find someone with whom to share the costs and risk.


Marriages of ConvenienceIn tough economic times business owners are considering useful — and sometimes risky —  business unions by Paul A. Norman    

You can hardly contain your excitement. You’re about to shake hands and agree to form a business partnership that will put you on the path to substantial wealth. Your skill at making your products is unmatched, and your new business partner has the savvy to market and sell them. Besides, who wouldn’t want tofu wedding cakes and ergonomic beer helmets? The two of you will pool your money and apply for joint credit to help front the startup costs.

Time to relax and let all the pieces fall into place, right? Not exactly. For every success story such as Hewlett-Packard, there are innumerable partnerships that never make it past their second year.

These days, when budgets are tight and credit is often harder to attain, you may only be able to start a business if you can find someone with whom to share the costs and risk.

There are several potential benefits to operating your business as a partnership. As with the example above, your skills may complement your partner’s, which would allow each of you to focus on what you do best. One of you may be a shrewd negotiator or a marketing whiz, while the other is the creative force behind the product or service. And you might welcome the chance to share the management responsibilities and workload.

Keep in mind, though, that splitting the costs, management and workload of a business often is a double-edged sword, as the potential conflicts that can arise from these aspects of running a business are infinite. The bottom line is that, as with everything in the business world, partnerships come with potential pitfalls. However, with careful planning, self-awareness and communication, you can avoid these common traps and increase your chances of becoming the next Jagger and Richards, instead of the next Spears and Federline.

Here are some tips to help you on your way to partnership paradise.

Know Your Partner

You wouldn’t go into business with someone you don’t trust, but what about someone you do trust? Even if you “know” someone personally, it is a good idea to get to know him or her in the business sense before staking your family’s prosperity on that person’s credentials. If a partner has bad credit, a history of failed businesses, different ethical views or other traits you might find worrisome, you need to know about them before going into business with that person.

Check References

Ask former business associates about their experiences with the potential partner. Pull a credit report and perform a criminal background check, if necessary. There is absolutely no substitute for surrounding yourself with honest, trustworthy and reliable people.

Culture Clash

The most common killer of partnerships is the personality conflict. Be honest with yourself about the type of person you are, what you find important and how you think a business should be run:

  • Are you comfortable making joint decisions, or would you rather call your own shots?
  • Do you tend to work 15-hour days?
  • Do you prefer to leave at 5 p.m.?
  • Are weekends for family?
  • Would you rather minimize costs, or are you more liberal with your spending?
  • Are you a disciplinarian with regard to employees?

There are no right or wrong answers here, but the important thing to remember is that you should discuss your beliefs, priorities and expectations with your potential business partner before jumping headlong into the partnership. Define your goals for the business, as well as its purpose. While it is inevitable that the needs of your business will change as the business develops, those who nail down a starting point for the direction of the partnership are much more likely to see those changes coming. As with any relationship, compromise will be required of both parties, but if you are clear about what matters to you most, you’ll be able to spot the deal-breakers.

Protect Yourself

Get it all in writing. Without question, the most essential tool for anyone entering a business partnership is the written partnership agreement. A partnership agreement is a legally binding document that specifies the manner and conditions under which the partnership is formed, managed, operated or even dissolved. While it is possible to have a legally recognized partnership without a written partnership agreement, a written agreement allows you to protect your interests in ways that state law will not by articulating provisions that are unique to your business and personal circumstances. Some of the most common elements addressed in a partnership agreement are the roles and responsibilities of partners, salaries, structure of the partnership, potential expansion, financial commitment and liability of each partner, day-to-day management protocols, settlement of disputed issues, dissolution of the partnership, and proprietary issues — that is, the use of intellectual property and what happens when a partner has an outside interest that competes with the business interests of the partnership.

Put It in Writing

The written agreement can be as general in scope or as specific as you like. The rule of thumb is that the more subjects you cover, the more you are protected. A shockingly high number of partnerships are formed solely by a verbal agreement or an “understanding,” only to end up dissolving, ultimately leaving the former partners with unnecessary stress and a hefty legal bill from cleaning up the mess. If we learned nothing else from the movie “Jerry Maguire,” it is that a handshake agreement just doesn’t afford the security that a binding legal document provides. Select an attorney who either specializes in or has significant experience with partnership agreements and hammer out the details. Your attorney will be happy to guide you through the process and discuss any questions you may have. Don’t wait.

Contingency Plan

Hope for the best, but plan for the worst. Perhaps the most important item to address in your partnership agreement is an exit strategy. As with any relationship, business partnerships often go bad. Many partnerships fail because one partner feels he or she does most of the work, provides most of the creative direction or ends up with more responsibility than what was originally outlined in the partnership agreement. Your personal and business-related goals can change over time, as may your partner’s. Sometimes you just have to agree to disagree, but your partnership should contain a method of resolving conflicts and rectifying inequities when you’re at a stalemate. If the conflict cannot be resolved, you need a way out of the partnership that won’t ruin you financially. Work with your attorney to specify conditions and procedures for removing or buying out a partner if things go south, and set a method for determining the value of each partner’s share of the business if one partner wishes to buy the other out.

Beware of Friends

The trickiest potential landmine faced by those forming a partnership occurs when two or more of the partners are friends. If you go into business with a friend, especially one you have known for years, you might think that you don’t need to worry. However, it is a time-tested fact that nothing erodes a friendship like running a business, so proceed at your own risk. More often than not, when friends go into business together and the partnership does not work out, the friendship is irreparably damaged in the process of sorting out the remains of the business. Remember that the partnership is also your source of income, and a little preparation now can save major headaches later. Do what you need to do to protect your interests, and don’t feel badly about it. As billionaire entrepreneur Carl Icahn once said, “You learn in this business. If you want a friend, get a dog.” n

This article is for general information only and should not be considered as legal advice or counsel. Such advice can be properly given only by qualified professionals who are fully aware of particular circumstances.

Choosing the Right Proposal

There are many different options for structuring business relationships. Get expert advice before you decide which is right for your situation.

General Partnership In a general partnership, all of the partners share equal rights and responsibilities in the management of the business, and each partner assumes personal liability for the debts and obligations of the business.

Limited Partnership A limited partnership consists of at least one general partner and one or more limited partners. A general partner assumes full personal responsibility for the debts and obligations of the business, and maintains management and control of the business. A limited partner does not participate in the management of the business, and a limited partner’s risk is limited to his or her investment in the business. General partners and limited partners share in the profits and losses.

Limited Liability Partnership (LLP) An LLP is basically the same as a general partnership, except that a partner is not individually liable for the acts of other partners or the partnership.

Limited Liability Limited Partnership (LLLP) An LLLP is a limited partnership for which a general partner is not liable for the acts of the limited partnership.

Limited liability company (LLC) An LLC combines the tax flexibility of a partnership with the limited liability of a corporation.

Joint venture. A joint venture functions like a general partnership but is usually structured for one common objective and for a specified period of time, such as one project or one business transaction.