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Essential Steps to Consider When Entering a Business Partnership

— October 29, 2021

Partnerships are often advantageous, but you should always be extra cautious so you can make the most out of your business decisions and avoid financial and legal issues in the future.

Entering a business partnership is advantageous, especially if both parties share the same goals and core values. Partnerships can be exciting if you know that your target partner can complement your skills and significantly help you grow your business. However, you should hold your horses as entering a lousy partnership can cause serious consequences. Unlike other business processes, jumping impulsively into an agreement is not something you can easily undo. 

To avoid facing huge profit loss or legal issues, you should first consider the different factors before sealing the agreement. Here are some of the essential steps you need to consider before entering a business partnership.

Outline the Roles and Responsibilities of Both Partners

When forming a partnership, make sure that you set clear expectations right from the very start. Managing the duties and expectations of both parties is essential so that both partners will clearly understand their responsibilities. There should be a consensus regarding things like the expected time obligations and the contributions of each partner. Setting these factors clearly from the start can help you avoid problems and misunderstandings later in the partnership.

Consider How You Can Align the Partnership Towards Profit

Make sure that the partnership will ultimately lead to better profit and business growth. To be able to do this, you should know how you can measure the performance and outcomes of your business processes and investments. Remember, accounting is important in business. Decide on how you should manage your business finances. Consider the possible scenarios that may happen (whether good or bad) and plan on how both partners will act in each situation.

Decide on the Legal Business Structure of Your Partnership

Before jumping into a partnership, it is wise to know your options and decide on the type of partnership that would benefit you the most. There are four types of business partnerships: general partnership, limited partnership, limited liability partnership, and limited liability limited partnership. Here are some brief explanations about each type of partnership:

Handshake: image courtesy of geralt via Pixabay,

General Partnership

A general partnership is the most basic form of partnership. This type of partnership does not require both parties to file with the state. Thus, this option is advantageous as it is easier to set up. However, this kind of partnership is also easy to dissolve and is more vulnerable to risks.

Limited Partnership

Limited partnerships are authorized by the state, with one partner being fully responsible for the business. The other partners provide the resources such as money, but they do not directly manage the business.

Limited Liability Partnership

Limited liability partnership, on the other hand, involves all partners actively managing the business. This setup provides excellent protection to each partner, but it limits each partner’s responsibility to the business and liability for another’s actions.

Limited Liability Limited Partnership

Limited liability limited partnership is a relatively new type of partnership. This setup works like a limited partnership, but at least one partner acts as a general partner who actively manages the business.

Outline the Steps for the Exit Strategy for Both Partners

Partnerships are often not permanent. Soon, one partner will need to exit the partnership due to particular circumstances. To avoid conflict and misunderstanding, outline a good exit strategy that both partners can take when they want to sign out of the agreement. Think of contingency plans when such a scenario happens and decide how partners will be compensated. Feelings of betrayal and leaving in bad faith are the last things you want to see in a partnership. The best way to handle such a scenario is to sign an agreement before jumping into the partnership.

Put the Agreement into a Written Contract

Of course, both partners should solidify all these steps by putting them into a written agreement. A well-crafted written contract can protect both parties from liability issues. By signing a contract, it forces each partner to fulfill their duties and responsibilities. In your case, it helps you understand the boundaries and limitations of the partnership and protect you from conflict of interest.

Double Check the Contract and Consult for Legal Advice

Writing the contract in one go and signing right away is a lousy business move. Contracts can be deceitful when it is too complex, uncertain, or ambiguous. Agreements may contain loopholes and risks that are hidden in some clauses. Thus, always make sure to double-check the contract before signing.

When you are running a large business, contracts can be too tedious to review. If you are new to the system of partnerships, signing contracts can also be tricky. The best way to avoid putting yourself in a bad spot is to consult for legal advice. You can also incorporate Artificial Intelligence in your setup by making use of contract analysis. Contract Analysis is an automated way of reviewing the metadata values and clause types in a contract. Such software does not only help you develop and understand contracts. It also assists you in other areas such as contract management, maintenance, and operation.

Being careful is one key characteristic that a successful business owner should have. Partnerships are often advantageous, but you should always be extra cautious so you can make the most out of your business decisions and avoid financial and legal issues in the future.

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