How to Form a Business Partnership
Interested in forming a business partnership? There's more to it than just hanging up a shingle with a couple of friends. Partnerships are legal entities that need to be formed with care.
The formation of a business partnership occurs when two people agree to participate in the co-ownership of a business.
With little more than a verbal agreement, you and your partner can be launch a brand, new business venture.
However, if you want your new partnership to have a fighting chance at success, the process is a bit more involved. In fact, to properly form a business partnership you will need to carefully execute at least seven steps:
- Choosing a Partner. You can't have a partnership without a partner. So the first step in forming a business partnership is to carefully choose a partner who shares your goals and brings unique talents (or resources) to the business. If a potential partner doesn't meet those criteria, move on.
- Buying In. In most partnership arrangements, ownership shares are determined by the amount of equity each partner invests in the business. But keep in mind that equity doesn't necessarily need to be in the form of cash. In certain situations, physical assets and skills can also be considered equitable assets.
- Establishing Responsibilities & Compensation. Deciding who does what is a big deal in a partnership, especially if one or more partners is accustomed to working as a sole proprietor. Responsibilities should be divided according to each partner's strengths and individual compensation should be discussed long before the doors open for business.
- Determining Profit & Loss Distribution. Profit and loss distributions are typically based on ownership shares. But whatever you decide, remember that profit and loss will also have personal tax ramifications for the partners since most partnerships are "flow through" business entities.
- Making Decisions. Someone has to decision making authority in the partnership. Early in the process, you and your partner will need to reach an agreement about how decisions are made and what happens when conflict rears its ugly head in your business partnership.
- Defining an Exit Strategy. You and your partner will also need to discuss and agree on an exit process should one of you decide to leave the partnership. The time to decide on an exit plan is when you are forming the partnership rather than when one partner decides it's time to move on.
- Putting It In Writing. The last stage of forming a business partnership is to put your partnership agreement in writing. The agreement should be drafted by an attorney and signed by all partners.
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