Manufacturers & Distributors ARTICLE -

Strategically Planning a Business Partnership

Start Your Business Partnership Off On the Right Foot

Target Audience: Manufacturing and Distributing Companies, New Business Entities, M&D Industry

Regardless of what industry you’re in, a strategically planned business partnership can be a smart option for starting a company with greater potential and fewer expenses than going it alone. It’s important to evaluate whether a partnership is the best option in your specific case — and it’s vital that you take the necessary steps to ensure its success.

Much of the appeal of a business partnership lies in its ease and flexibility. General partnerships are considered “pass-through” tax entities, meaning that profits or losses pass through to the partners. As a result, the partners themselves are taxed through their individual tax returns, and you will not need to file an additional federal return for the partnership. However, you’ll need to fill out an IRS Form 1065 information return, which reports the income, deductions, gains and losses of the partnership.

A partnership’s flexibility allows you and your partners to set your own guidelines, including how you’ll structure the business and divide profits. In addition, your partnership is considered a discrete asset, which allows it to be transferred to successors or heirs later on.

Typically, each partner’s heirs inherit his or her share of the partnership’s assets. The partners should decide the details of succession and include them in a written agreement. If succession isn’t addressed, a partner’s death will dissolve a partnership automatically. In this case, the remaining partner or partners would pay the debts of the partnership and divide remaining assets according to the agreement.

Prepare a Written Agreement for a Business Partnership

After you and your partner have decided to move forward with creating the partnership, put your agreement in writing. Legally, a partnership doesn’t require a written agreement, but choosing to go without one means your rights and obligations will be determined by state law.

A typical written agreement lists the partners involved and details the capital and services each person brings to the partnership. To keep the terms of your partnership flexible, make sure the agreement addresses each partner’s share of profits and losses, management and control, capital contributions, methods of funding, and individual salaries.

The agreement also should detail the procedures in the event of a buyout or the entrance of a new partner. Work with an attorney who has experience with partnership agreements to make sure you address all necessary issues in your agreement.

Protect Your Interests

To maximize your partnership’s potential and preserve its effectiveness, it’s important to take some logical precautions. Of course, you should enter into a partnership only with a person or people you genuinely trust, but even then you don’t want to take on any more personal financial risk than necessary.

Make sure you define whether your partnership is “general,” in which each partner assumes equal liability for the business’s debts, or “limited,” in which one partner assumes full management responsibility and the largest share of any liability.

The remaining limited partners hold less power, but can be held liable only up to the amount of their financial contribution to the partnership. Therefore, if a lawsuit results, say from an injury inflicted by partnership-owned equipment, the injured party can seek the single general partner’s personal assets as damages. On the other hand, only the amount of the limited partner’s investment is at stake.

Also, be sure to establish a solid exit strategy within your agreement. It may not sound like the most pleasant task, but it’s better to be prepared than be forced to scramble for proper procedure should a partner decide to leave or a buyout occurs. And if you’ve chosen to enter into a partnership with a friend, remember to keep personal issues separate from business interests to better ensure the success of your partnership.

Just the Beginning

A business partnership could be just what it takes to launch your business and make it profitable. It all starts with finding a complementary partner, the right contributions, a solid understanding of the options and benefits available, and a written agreement to bring it all together.

Choosing a Potential Business Partner

You meet. You spend time getting to know each other, evaluating the other person’s worthwhile qualities. And ultimately, you decide to part ways or enter into a long-term commitment. At face value, choosing a business partner is a lot like dating, only this time your business is on the line.

For every history-making business partnership, there is a pairing that isn’t so successful. Whether an association lasts or tanks lies in the details, and there are certain qualities, including drive and financial responsibility, that you should look for in a potential partner before agreeing to a partnership.

First, evaluate your shared vision. Are you on the same page when it comes to where you want your partnership to go? If one partner wants to take the new business to its peak of growth and financial success, and the other is more apathetic toward its outcome, the driven partner will end up leading on his or her own. This defeats the purpose of joining forces in the first place.

That same need for balance extends to other areas as well. You and your partner should have a similar idea of how much time you will devote to the business on a day-to-day basis. And you should have a personal connection that allows for compromise, especially when drafting your written agreement. You won’t always be on the same page, and sacrifice from both sides will sometimes be necessary.

A potential business partner should have skills and knowledge that mesh with your own. Even though your vision should be the same, the resources you bring to the table should be different, but complementary. Even if it requires a background check, you should be confident that your partner has a clean past, legally and financially. And it always helps to choose someone who has business connections that can be used to your new company’s advantage.

Find out how our M&D accountants can add value to your business. Email us or call us at 1 (888) 875-9770.

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