The concept of choosing, vetting, and ultimately going into business with another person can be intimidating. You want to learn everything about the background of a potential business partner, in addition to making sure you’ll get along well on a personal level.
Vetting a business partner can include everything from learning about any criminal convictions or financial problems to finding out more information about their previous businesses, if relevant.
The following is a guide to business partnerships and what to know about working with someone in this capacity.
What Is a Business Partnership?
A partnership in the business sense is a legal relationship that you have with someone else. Business partnerships are formed through an agreement between two or sometimes more individuals, and in this relationship, they operate a business as co-owners.
You essentially organize your company in a partnership so that it’s own and run by two or more people, and then, as partners, you share in both the profits and losses.
Partners will invest their money into the business, and the partnership typically has to register in any state it’s doing business.
Every state can have its own type of partnership you can form, so you need to know all available options before registering anything.
Partnerships are similar to working as an independent contractor or sole proprietor because, in those scenarios, the business isn’t separate from its owners for purposes of liability. This is in contrast to a corporation, which is a separate entity from the owners.
The partnership itself doesn’t pay income tax. After the profits or the losses are divided between the partners, each partner then pays income tax on their individual tax return.
There are typically three available types of partnerships.
In a general partnership, the partners participate in day-to-day operations, and they have liability as owners for any lawsuits or debts.
In a limited partnership, there’s one or maybe more general partners. The general partners manage the business, and they’re liable for the decisions. Then, there are one or more limited partners who don’t participate in operations, nor do they have liability.
In a limited liability partnership, all the partners have legal liability protection, including general partners.
A limited liability company (LLC) can have two or more members or owners, and it’s treated as a partnership for purposes of taxes. The primary difference between an LLC and a partnership is that with an LLC, the members are usually shielded from any potential personality liability, but this often doesn’t extend to partnerships. A simple LLC Operating Agreement form will help to identify your business as a limited liability company and establish how it will operate.
How Do You Form a Partnership?
When you form a partnership, you usually do so by registering in the state or multiple states where you do business. The specifics of this process vary.
You’ll use a partnership agreement to outline the specifics of the relationship between partners, including the contributions each will make, their roles and responsibilities, and how much each partner will share in the profits and losses.
A partnership agreement seeks to proactively allocate decision-making power and outlines how disputes will be resolved. A good partnership agreement answers all the possible what-ifs that could come up in different situations.
The Pros and Cons of Business Partnerships
As with anything, there are upsides and downsides to a business partnership.
Some of the pros of partnerships in business include:
- You can share the workload with one another. You’re going to have multiple people who can potentially help with different tasks that need to be done. Your business, as a result, may be more efficient, and you can get things done faster.
- In partnerships, if one of you is lacking in experience or knowledge, then there are ways that the other can pick up the slack. Each partner may have their own knowledge and unique experiences they can bring to the table, building a stronger business overall.
- You can split the financial costs of starting and maintaining a business.
- You may have the chance to explore more opportunities when you have a partner.
The downsides of partnerships include:
- There are inevitably going to be disagreements. You can typically manage these disagreements through conversation or negotiations. However, when disagreements aren’t manageable, your only option may be to end the partnership. In that case, you’ll have to come up with an exit strategy.
- You have to make joint decisions. That means every decision can take longer to make since you have to come to an agreement.
- You’re going to be sharing the profits, and the more people who are part of your partnership, the more you’re sharing.
- While you do have to file an annual income report as a partnership in the U.S., you don’t pay income taxes together as a partnership. You’re taxed individually and not as an entity.
- Many times in partnerships, agreements are informal, so they can create challenges.
Finding and Vetting a Business Partner
Maybe you have a business idea, and you know you want a partner to bring it to life. Obviously, in that case, you’ll have to find someone. It could also be that you already have a partner, but you want to vet them to ensure you’re making the right decision.
In either situation, the following are things to remember.
- If you’re looking for a partner, try to identify someone that has skills and experience in different areas than your own. That way, your strengths can complement one another, and one can fill in the gaps for the other and vice versa. If you both have the exact same background and skillset, then you’re going to find that you’ll have to fill in the gaps by bringing other people on board.
- Try to find someone to work with who shares your vision and values. The technicalities tend to be things you can work out as long as you’re moving forward together with a shared spirit.
- A good partner shouldn’t have a lot of personal baggage or big challenges outside of their work life. Running a small business is a huge undertaking, and if your business partner is constantly dealing with crises in their personal life, it’s either going to take a toll on your business or force you to pick up all the slack.
- Having a business partner with industry connections, access to key resources, or a strong client list can all be helpful things to look for.
- Your partner should be financially stable, and you need to get a full picture of their finances during the vetting process. If your potential partner is in a financial crisis, there are so many reasons you probably don’t want to go into business together. First, it’s a red flag if someone has drastically mismanaged their personal finances. It’s unlikely they’re going to be someone who has the discipline to make the finances of business work. Money and time management are critical skills for entrepreneurs. In the worst-case scenario, you could even find yourself in a situation where your partner is stealing from the business because of personal financial issues.
- A partner should be ethical in all areas of their life, both business and personal. You need to be able to trust your partner, and they need to be honest.
- Your partner should be someone you respect, and you should feel they also respect you.
- A partner should be energetic, excited, and passionate about succeeding.
- You should only partner with someone who’s willing to put any and everything in writing.
So how can you vet a potential business partner to make sure they’re checking all the above boxes?
- Do your own research. You can check out your potential partner online. Go over their social media accounts. Go back as far as you can to learn more about how the person portrays themselves, their character, and their thinking. You can also look for online articles and other citations that will give you some insight into how others see this person and what their general reputation is like.
- You can run a credit check on a business. If your future partner already has a business, then do that. You can also run a credit check on them personally.
- It’s a good idea to run a background check before you go into business with someone. You should think about getting a full background check but talk to your potential partner before doing so. You want to be upfront about the vetting that you’re doing. Not only do you want someone who’s generally trustworthy, but a record of certain crimes could actually end up preventing you from raising money or getting certain government licenses.
- You might hire the other person for a limited period or work with you on a particular project to see how you work together.
- Have a talk about money. You need to go over what you’re both bringing to the table, how much you need to get paid, and how long each of you could potentially go without a steady paycheck.
Finally, again, get everything in writing. You should have an attorney write your partnership agreement after you’ve vetted your partner. As a side note, expect that a good business person will want to vet you similarly.
