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What Form Should Your Business Be?

Oct 10Andrew Tucker
Flickr Pie Charts And Free Accounts

Basically, there are three forms that one can use to start a business:  a Sole Proprietor, a Partnership or a Corporation.  Of course,  there are variants to these forms.

Brad Sugars wrote a couple of articles for Entrepeneur magazine about this. This blog is about Partnerships, my next blog is on Corporations.

Avoid These 7 Partnership Killers

In theory, a partnership is a great way to start in business.  The reasons are simple: complementary skill sets, shared equipment or expenses, and the idea that one person with “hard” money capital can create synergy with the intellectual capital of another person so both can profit from their venture.  

However, it’s not always the best way to organize a business.

If you’re thinking about a partnership, consider the following list and avoid the potential pitfalls:

1. Sharing capital instead of expenses:
Whenever you share your own capital–be it money, resources, information or property–you automatically give away your enterprise ability. In a perfect world, the person you are partnering with is upright, full of integrity, and not at all tempted to take this gift and run with it as his own. However, the world’s not perfect. So be careful. Instead, work out an arrangement where expenses are shared in an “associative” arrangement. It also makes it easier to walk away if things go wrong.

2. Partnering with someone because you can’t afford to hire:
This is a partnership killer right from the start. The scene is always the same: Bob has a business idea and Fred has the business skills, but Bob can’t afford to hire Fred as an employee, so they decide to share duties, expenses and profits. What happens is both Bob and Fred end up working against each other, and Bob finds himself liable for Fred’s obligations (financial and otherwise) under the partnership agreement. If you’ve got the idea and someone else has the skill, simply hire him or work out an independent contractor agreement. Don’t give away what you don’t have to.

3. Lacking a written and signed partnership agreement:
Every detail and obligation must be clearly defined and written out, and agreed upon by all parties. This is best done with a written legal agreement drafted by a well-qualified, mutually agreed-upon lawyer. Make sure the attorney is well-versed in business partnerships!

4. Overlooking a limited partnership:
One of the main downfalls of a partnership agreement is the assumption of liability each partner makes for the other. You could use a limited partnership instead where the limited partner is not liable for the actions or obligations of the general partner(s). Again, make sure an attorney prepares the partnership agreement.

5. Lacking an out or an exit strategy:
In any partnership agreement, define the terms of an exit strategy that allows you or your partner to walk away from the partnership, or that provides options to buy out the other party. This can be done very clearly and simply–and without imploding the operations of a successful business.

6. Expecting the friendship to outlast the breakup of the partnership:
Don’t go into any partnership with a friend expecting to remain friends after a partnership breakup. It may sound great to do business with your friends, but remember, in the business world, it’s always business first and friendships second. Most times when the business ends, so does the friendship.

7. Having a 50/50 partnership:
Every business, including partnerships, needs a boss. If you decide to go the partnership route, make it a 60/40 or 70/30 split. Then you and the business have a point person for accountability and overall operational control. Also, keep your buyout or exit strategy clear and in your favor–benefiting you and saving problems down the road.

As a final note, I leave you with an interesting solution to the partnership issue from a company most people know: Baskin-Robbins.

When Burton Baskin and Irvine Robbins first considered partnering in the ice cream business, Robbins’ father advised against it, thinking the compromises each man would make in getting the partnership to work would kill the product’s potential. So the men each worked on their own businesses for two years before combining Robbins’ five shops with Baskin’s three stores under one name decided by the flip of a coin. Only after successfully launching and running their own separate businesses did the subsequent partnership actually work.

If a partnership arrangement worked for those two retail pioneers, it just may work for you.

Read the entire article.

I am not an attorney nor do I intend to give legal advice.  If you have an interest in the article and possibly setting up or learning more about a Partnership, please contact an attorney that has expertise in this area for advice.

Stay tuned for my next blog on Corporations.

photo credit: flickr – iPad sketches via photopin (license)

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