It’s lonely at the top. Even if, by the “top”, it’s just about running a whole new business. That’s why many great companies have been started by partners: Ben and Jerry. Steve Jobs and Steve Wozniak (Apple). Larry Page and Sergey Brin (Google).
Starting a business with a partner offers many advantages. You have:
- Someone to share the excitement of starting a business with
- Someone to share the risks of running a business
- Someone to brainstorm ideas with
- Someone who has talents and skills to balance yours
- Someone to help with the financial burden and workload
Ideally, in a partnership, there is strength in having a balance of complementary talents or personalities. You can be a great “outside” person: doing sales, marketing, and networking. Your partner can be a great “inside” person: getting certain bills paid and your products or services produced.
Admit it: starting and running a business can be a lot more fun when you’re working with someone you like and respect.
But partnerships come with perils. Over time, partners are likely to have disagreements, resentments, changing goals and life choices. Partners may have conflicts over how to spend money, who to hire, what direction the business should take. When partners don’t get along, the business inevitably suffers.
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If you’re considering starting a business with a partner—or if you already have a partner—it’s important to think through and formally structure your relationship.
I learned this lesson the hard way.
Once I started a business with a partner. In the beginning, we liked each other, strategized together, traveled together to meet clients and strategic partners. We thought we had the same objectives, the same commitment. Everything was fine, until it went wrong.
Then came one of the most stressful periods of my entire working life. Not just because the partnership was falling apart, threatening the business. But because we had never had a partnership agreement.
It’s true: I, a small business expert, had screwed up. And I paid the price: not just in legal fees and the disappearance of the company, but in stress.
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So before committing to a partnership, make sure you:
Put it in writing
Have an in-depth discussion with your partner, during which you decide how you will handle these problems, if and when they arise:
- What is the distribution of ownership? Who owns what percentage?
- If it’s a 50/50 split (which I don’t recommend), how will you resolve disagreements?
- What are the jobs and responsibilities of each partner?
- How much time will each partner devote to the business?
- How much money will each partner contribute?
- How will general business decisions be made?
- Over what decisions does each partner have final authority?
- How will serious disputes be resolved?
- What happens if a partner wants to leave the company?
- What if a partner wants to sell the business?
- What happens if the company has to go into debt?
- What happens if a partner dies or becomes disabled?
- What if you want to bring in additional partners?
- Can partners work for another company or do other work on the side?
Draw up a written partnership contract. Have a lawyer draft a legally binding contract setting out the terms of your partnership. If you’re already working with a partner, you still need to! If a partner doesn’t want to do this, that’s a big red flag.
Choose a business form
A simple corporation does not protect either of your personal assets. Instead, consider incorporating or becoming a limited liability company (LLC) or Partnership (LLP).
Consider a buy/sell agreement
A “Buy/Sell” agreement sets out the terms under which one partner can buy out the other. This avoids value conflicts if the partnership fails. And you can discuss ways – like taking out life insurance – to redeem a partner’s heirs in the event of death or disability. After all, you probably don’t want to run the business with your partner’s spouse or children.
And here’s one thing to keep in mind: in the eyes of the law, you don’t need a written agreement to have a partnership. If, over a beer, you and a friend decide to start selling your special salsa at a street fair, you may have become partners. Your friend can acquire rights to your salsa recipe and you can each be responsible for all bills and obligations. So be very clear about the nature of the relationship before you start working with anyone.
Partnerships can be great, but when things go wrong between partners, it often means the death of the business.
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