Running a business alone can be a challenging endeavor. It requires decision-making, financial management, and a variety of operational tasks. This often leads many entrepreneurs to start their venture with a business partner or turn their existing company's structure into a partnership. By collaborating with a partner, they can share the responsibilities, leverage each other's strengths, and bring more ideas and skills to the table.
If you are thinking about forming a business partnership, there are several key factors to consider and guidelines to follow. This Huddle Business Capital blog article explains.
Reasons to consider a business partnership.
There are several reasons to consider a business partnership. For example, you might find yourself overwhelmed by the demands of running a business and recognize that bringing in a partner can alleviate some of that pressure. Next, a partnership can offer the advantage of sharing financial responsibilities, making it easier to manage operating costs, investments, and everyday expenses.
Additionally, you may seek a partnership if you lack knowledge about business-specific areas such as marketing, sales, networking, or finance. Partnering with someone who has a strong background in these and other related fields can enhance the business's strategic direction and performance.
What's more, a partnership can lead to an improved work-life balance. You and your business partner can enjoy well-deserved vacations and personal time away from the office, confident that your company is in good hands.
What to look for in a business partner.
Adding a business partner is one of the most important decisions you will make for your company. If you choose the right person, you can forge a partnership that fosters productivity, mutual respect, and ultimately leads to business success. Additionally, a strong business partner can help you attract and retain top talent.
Conversely, partnering with the wrong person can lead to misunderstandings, conflicts, and a negative impact on your company's culture and overall success. Therefore, it is advisable to avoid making a hasty decision and instead take the time to carefully select a business partner.
Here are some of the most important things to look for in a business partner:
Shared vision
You and your business partner must agree with the business's vision. Discuss your short-term and long-term goals, expectations, and aspirations to determine if your visions align with each other. Keep in mind that differing objectives can lead to conflict down the road.
Trustworthiness
Trust is a key to any successful business partnership. Look for someone who communicates transparently and demonstrates honesty, reliability, and ethical behavior. Of course, you want a business partner with a proven track record at previous companies, rather than someone who frequently changes jobs or has prolonged periods of unemployment.
Financial stability
It will be advantageous to have a business partner who knows how to manage money, lives within their means, and hasn't experienced financial problems such as bankruptcy. A fiscally responsible partner can budget wisely and help promote sustainable growth.
Good communication skills
Your business partner will play a vital role in your daily operations, engaging with you and your employees, as well as communicating with suppliers and customers. Given the importance of these interactions, it is crucial to select a partner with strong communication skills. Look for someone who listens actively, conveys ideas clearly, and has a friendly demeanor.
Solid work ethic
Look for a business partner who shares your level of commitment and work ethic. When meeting with a potential partner, have open conversations about the different roles and responsibilities that each partner would assume. It's crucial to explore their willingness to invest time and effort into the business.
Put pen to paper.
Once you have decided on a business partner, it's time to formalize everything in writing. The legal requirements for a partnership vary by state, and the business structure you have will impact taxes and liabilities. Although you might not need a formal partnership agreement, it is a good idea to have one.
The reason is that a partnership agreement outlines the roles and responsibilities of each partner, the contribution of resources, profit-sharing arrangements, and decision-making processes. Having this information clearly explained lays the foundation for a trusting business relationship and minimizes misunderstandings. Moreover, it can provide both parties with legal protection.
To ensure that your partnership operates smoothly and is protected legally, it is advisable to hire a business attorney to draft your partnership agreement. In addition to writing your partnership agreement, an attorney can advise you on the various licenses and permits that you may need, as well as any required registration with federal, state, and local agencies.
Get to know your tax responsibilities.
Regardless of the business structure you choose (ex: general partnership, limited partnership, and limited liability partnership), your company will function as a pass-through entity that does not pay federal income tax. Instead, all income, losses, deductions, and credits are passed to you and your business partner. Both of you are required to report your share of these items on your tax returns. Two important tax documents also need to be filed: IRS Form 1065 and a Schedule K-1.
Because paying taxes is the sole responsibility of you and your business partner, both of you need to complete and submit your tax returns promptly, before they are due. Keep in mind that you and your business partner might need to pay payroll taxes and state taxes. To ensure that your business tax return is complete and accurate, it is beneficial to consult a business accountant.
Handle business disagreements professionally.
No business partnership is without challenges. Over time, you and your partner may disagree on various issues, such as strategic direction, financial matters, or marketing messages. If this occurs, it's vital to handle them in a professional manner. Ensure that you actively listen to each other's viewpoints and work together to find common ground for resolving conflicts effectively.
Disclaimer.
This Huddle Business Capital blog article is purely educational and contains general information and opinions; it is not intended to provide advice or recommendations of any kind.
