A partnership is arguably the simplest form of business ownership that you can establish as an entrepreneur. With the promise of additional support in critical areas like management and funding, partnerships have several distinct advantages over solo ventures.
However, if it isn't managed with proper care and due planning, a partnership can quickly descend into a nightmare. It's essential to fully understand the structural and legal implications of a joint venture before you commit to such a journey, while it's also important that you know what is involved in the process overall.
Therefore, to help you out, we've compiled a handy guide on how to start a business partnership, as well as the key benefits and drawbacks to this popular approach.
1. Understand the Long-term Implications
In business, it is vital to possess a long-term vision when starting a new venture, and two factors above all others are of paramount importance in the long-term consideration of a partnership – liability and taxes.
Unfortunately, both are unavoidable; you can, however, reduce the burden they inflict on you and your partners with proper planning. This is where the structure and legal status of your partnership become important. Some partnership types can potentially minimise your tax burden, as well as the liability carried by each partner in the venture.
2. Decide the Role of Each Partner in the Venture
Finding suitable partners is, of course, the first step in any partnership venture; structural considerations follow immediately after that. Once you have zeroed in on one or more ideal candidates, it is crucial to consider some of the following details.
Money often plays a critical factor in a partnership, with each partner's financial contributions of particular importance during a company's early stages. Indeed, everything else flows from this fundamental process – the more someone contributes in a partnership, the more significant their stake in the business, including its profits, losses, and other liabilities.
Of course, it may also determine the level of influence wielded by that person, so decide carefully whether you want each partner to chip in equally, or let one or two individuals give more than the rest.
In the latter instance, you can still retain control if you choose your partnership type wisely. In a general partnership, every partner has a say in the management aspect, including the day-to-day decisions and the future planning of the company.
However, if you opt for a limited partnership with yourself as the active partner, you can wield more control over the organisation. In this form of partnership, the daily management is left in the hands of one individual while the rest function as limited partners whose roles are primarily restricted to providing capital for the business.
Then there is also the option to choose how a partner gets paid. In some instances, it might be beneficial to have a salaried partner who works and gets paid like any other employee. Equity partners, on the other hand, have a stake in any profit you make in the business.
3. Finalise the Structure and Name of the Partnership
Based on the above considerations, you have to make decisions regarding the type of partnership you want. Generally, there are three options:
- General Partnership - All partners are general partners, carrying an equal share of profits, losses, liabilities, and responsibilities.
- Limited Partnership - You can have both general partners and limited partners.
- Limited Liability Partnership - All partners are partially shielded from any liabilities related to the business.
All businesses need a name for practical and regulatory reasons, and if you want to register your partnership, then you have to decide on a name. Ensure that it's something all partners are happy with and which aligns with your commercial and marketing goals; after all, changing the name of a business organisation is a costly and complex task.
4. Register the Partnership
Unlike a corporation or a company, partnerships are not strictly governed by the law. In most countries, it is not even mandatory to register a partnership with the state authorities. However, the process of registration is relatively easy, and does come with a bevvy of advantages.
For starters, it gives the partnership added heft in all legal matters. You get legal proof of the existence of the business, which can be useful if you enter into any legal disputes or cases later on down the line.
Before you start the registration process, ensure that you have covered all the basics mentioned in the previous sections. Collect all the relevant documents and information and approach the government agency responsible for handling businesses and corporations in your jurisdiction. These days, registration can even be done online as well.
The most important document required is the partnership deed. It is an agreement between all the partners in the organisation regarding essential aspects of the organisations, including:
- The name of the partnership firm.
- The type of business.
- The starting date of operations.
- The capital contribution from all partners.
- The location of the head office and other branches (if any).
- The proposed duration of the partnership.
- Special profit-sharing arrangements (if any).
- Salaries and interest accrued.
- Terms regarding death, insolvency, or retirement of a partner.
- Procedure for the dissolution of the partnership.
It should be noted that many of these factors can be left out of the partnership deed. In fact, the deed doesn't even have to be in writing; it can be an oral agreement. By having it in writing, though, it makes it easier to uphold any claims later down the line, should a conflict arise.
You will have to submit a signed copy of the partnership deed when registering your partnership. There are also several other forms that need to be filled out at this time, but these are basic in nature.
Apart from the registration itself, you may also have to apply for special licenses and permits, although this depends on the industry you are involved in. Some of the more common bureaucratic requirements include sales tax registration, business licenses, municipal permits, and employer registration. Once you have completed all these formalities, you can legally begin trading as a partnership business.
Ultimately, the structural aspects of a partnership agreement are more important and complicated than the legal aspects; once you decide on the basics, registration itself is relatively easy. Though it is not mandatory, getting your partnership officially registered is also highly recommended, as it can save you a lot of trouble further down the line.
Is a business partnership the best approach for a small business? Let us know your thoughts and opinions in the comment section below!