It’s scary to be in charge of running a business all by yourself. A business partner can help you with some of the day-to-day tasks and make sure your business stays healthy and grows.
But if you don’t follow the right steps, chaos can happen. Follow these rules to build a strong relationship and avoid problems in the future.
Choose the Right Partner
It’s hard to give up all of your power, especially when it comes to your business. Once you give up equity in your business, it’s hard to get it back, so it’s very important to choose the right business partner.
Like in any relationship, being able to compromise is important in business, but it will be easier if you and your business partner share the same core values.
It takes time to build a relationship and dance in sync, but if you choose your partner based on how well you get along, you can get into the groove faster.
Think about the following when choosing a business partner:
- Do you trust this person?
- What kind of skills and qualities do they bring to the table?
- Are they financially stable and able to make a contribution?
- What are their strengths and weaknesses? Can their skills make up for what you don’t do well?
Prepare a Detailed Partnership Agreement
It’s not easy to start a business partnership. A detailed contract between you and your partner is a good starting point for working together well.
Even if you’re working with a friend, signing a formal agreement protects both of you legally, ends any ongoing disagreements, and helps you make important business decisions.
A good partnership spells out what each person will do, what they can expect, how much money they will get, and how decisions will be made.
Small disagreements that could turn violent and end the partnership will be settled by the contract.
Attorneys Fox and Moghul say, “It’s always better to deal with hard problems before they come up than to struggle to solve them later.”
So, the better the agreement, the more details it has. When problems come up, it will be less stressful to plan for them and talk about solutions within the contract.
Select a Partnership Structure
Depending on the business structure you choose for your partnership, each partner will be responsible for a different amount of debt and you will get different tax benefits.
Different entities have different pros and cons, so talk to a professional to find out what your options are.
Think about these structures:
- In a general partnership, everyone gets an equal share of the profits, liability, and management tasks. They are easy to start, don’t cost much, and are flexible, but you risk your own assets if something goes wrong.
- One partner can have full control and all of the liability in a limited partnership, while the other partner has limited (or no) control and liability.
- A limited liability partnership, or LLP, protects the personal assets of its partners and limits their personal liability for the business’s debts or the actions of other partners.
Comply With Regulatory and Tax Requirements
As a partner in a business, it is your job to follow government rules and take care of business taxes. Laws and taxes can be different depending on where you do business, what kind of business you run, and how your partnership is set up.
You may need licenses and permits before you can work together. Most business partnerships must register with federal, state, and local agencies and get a tax and employer ID number.
You may also need other licenses and permits, such as a business license, a DBA license, a sales tax permit, or a license for your industry. Check with your state and local government to find out what permits and licenses you to need.
The federal income tax is not paid by partnerships. Instead, the company uses informational IRS Form 1065 to report its gains and losses.
It then files and gives each partner a Schedule K-1. On your personal tax return, you will use Schedule K-1 to list any income, losses, deductions, and credits.
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