Partnerships

Question: Can you advise what I should consider in forming a partnership and if I do what recommendations do you have if it doesn’t work.

Answer: First, if you don’t think it will work, don’t do it. But like all relationships, business partnerships have ups and downs and both ends of the spectrum need to be addressed.

According to the Company Warehouse, forming a partnership has both advantages and disadvantages.

Advantages

Capital – Due to the nature of the business, the partners will fund the business with startup capital. This means that the more partners there are, the more money they can put into the business, which will allow better flexibility and more potential for growth. It also means more potential profit, which will be equally shared between the partners.

Flexibility – A partnership is easier to form, manage and run. They are less strictly regulated than companies, regarding the laws governing the formation and because the partners have the only say in the way the business is run (without interference by shareholders) they are far more flexible in terms of management, as long as all the partners can agree.

Shared Responsibility – Partners can share the responsibility of the running of the business. This will allow them to make the most of their abilities. Rather than splitting the management and taking an equal share of each business task, they might well split the work according to their skills. So if one partner is good with figures, they might deal with the bookkeeping and accounts, while the other partner might have a flare for sales and therefore be the main sales person for the business.

Decision Making – Partners share the decision making and can help each other out when they need to. More partners mean more brains that can be picked for business ideas and for the solving of problems that the business encounters.

Disadvantages

Disagreements – One of the most obvious disadvantages of the partnership is the danger of disagreements between the partners. Obviously, people are likely to have different ideas on how the business should be run, who should be doing what and what the best interests of the business are. This can lead to disagreements and disputes which might not only harm the business, but also the relationship of those involved. This is why it is always advisable to draft a deed of the partnership during the formation period to ensure that everyone is aware of what procedures will be in place in case of disagreement and what will happen if the partnership is dissolved.

Agreement – Because the partnership is jointly run, it is necessary that all the partners agree with things that are being done. This means that in some circumstances there are fewer freedoms with regards to the management of the business. Especially compared to sole traders. However, there is still more flexibility than with limited companies where the directors must bow to the will of the members (shareholders).

Liability – Ordinary Partnerships are subject to unlimited liability, which means that each of the partners shares the liability and financial risks of the business. Which can be off-putting for some people? This can be countered by the formation of a limited liability partnership, which benefits from the advantages of limited liability granted to limited companies, while still taking advantage of the flexibility of the partnership model.

Taxation – One of the major disadvantages of partnership, taxation laws mean that partners must pay tax in the same way as individuals.

Profit Sharing – Partners share the profits equally. This can lead to inconsistency where one or more partners aren’t putting a fair share of effort into the running or management of the business, but still reaping the rewards.

In forming a partnership, you have to evaluate what are your skills, what are your potential partner’s skills and how do they mesh? Are they complementary, similar or in competition with one another? You want to have skills that complement one another. If one is good at sales, the other should be good at operations.

Try this checklist if you are considering a partnership: Contributed by Randy St. John, Nashville, TN Chapter

• Name of partnership
• Duration of the partnership — number of years or “until “
• Location of office
• Capital contribution of each partner
• Whether partners may make additional contributions
• The level at which capital accounts of the partners must be maintained
• Participation of each partner in profits and losses
• Salaries, if any, to be paid to partners and whether or not these salaries are to be treated as expenses in determining distributable profits
• The amounts of any regular drawings against profits
• Duties, responsibilities and sphere of activities of each partner
• Amount of time contributed by each partner
• Prohibition against outside business activities by partners that would be in competition with the partnership business
• Who is to be the managing partner and whose decision will prevail in case of a tie or dispute?
• Procedure for admitting new partners
• Methods of admitting junior partners without capital if such a procedure is to be considered desirable
• Methods of determining the value of goodwill in the business in case of death, incompetence, or withdrawal of a partner or dissolution of the partnership for any other reason
• The method of liquidating the interest of a deceased or retiring
• Age at which a partner must withdraw from active participation and arrangements for adjusting his salary and equity
• Whether or not surviving partners shall have the right to continue using the name of the deceased partner in the partnership
• The period in which retiring or withdrawing partners may not engage in a competing business.
• The basis for the expulsion of a partner, method of notification of expulsion, and the disposition of any losses that arise from the delinquency of such a partner
• How will the event of the protracted disability of a partner be handled?
• Whether the accounts are to be kept on a cash or accrual basis and, if on the cash basis, the method of compensating partners who withdraw or retire for income realized on services rendered, but not invoiced at the time of their withdrawal or retirement.
• The fiscal year of the partnership
• Whether or not interest is to be paid on the debt and credit balances in the partners’ accounts
• Where the partnership cash is to be deposited and who may sign checks
• Whether or not all partners shall have access to the books of the account
• Under what conditions limited partners may be accepted into the firm and, if so, who shall be designated as the general partner
• Prohibition of the partners pledging, selling, hypothecating, or in any manner transferring their interest in the partnership except to other partners
• Identification of material contracts or agreements affecting the liability or operation of the partnership.

Create a partnership agreement. How will you organize? Who plays what roles? How will the work be divided? When a key decision needs to be made, how will it be executed?

Be honest about the relationship

If every day is a toxic day, then it’s time to re-evaluate the partnership. You need to make all efforts to salvage the relationship, but in the end, it might be best for the company to go to Plan B.

In generating a Plan B, ask yourself if you partner wasn’t there, how will you get the work done? What skills need to be outsourced?

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