We recently discussed two different ways to fund your microbusiness: you can search for investors or take out a loan……but those are not the only ways. A third way is to find a patient yet financially secure partner who is willing to invest in your business. So let’s discuss partnerships.

What is a Partnership?

As already discussed in the previous blog, A Quick Look at Business Structures, a partnership is run the same way as a sole proprietorship, which is a business in which the individual, or in this case, individuals, are legally considered the same entity as the business. When doing taxes, the business’s profit or loss impacts the business owners’ personal bottom line. For more information on the IRS’s take on partnerships, visit their website here.

The difference between a sole proprietorship and a partnership is that, in a partnership, more than one person is contributing funds to the growth of the business, and each partner shares in the profit or loss of the business, and, no, the members of a partnership do not need to be equally vested in the business. The biggest thing about a partnership is that it is not much different than a marriage: the partners are in the business for the long haul – for better or worse.

Advice About Partnerships and a Tale or Two

Before you decide to step into a partnership, there are a few things that you need to keep in mind, along with what may happen if you don’t heed this advice. 

• Make sure to have specific agreements in place before you start the partnership. Include buyout clauses should a partner ever decide to part ways as well as performance standards for each partner that are specific and measurable. I had a competitor whose partner, “Sharon,” left the business. I asked Sharon about her buyout agreement, and she told me that she was given 40% of the business to come on board and the majority stakeholder, “Rick” told her that in order to buy her out, Sharon would have to declare bankruptcy. In addition, Rick, who owned 60% of the company, couldn’t come up with the money to buy out Sharon’s 40% and he couldn’t continue the business with 40% of the business’s shares belonging to Sharon, who was now an ex-employee. Due to this, Rick ended up closing the business and moving out of state.
• Take caution when turning friends into business partners. A friend who makes a good drinking buddy may not make a good partner. When a partner is not pulling his or her weight, it causes friction between the partners, and if you then add a spouse with strong feelings into the mixture, it can be a recipe for disaster. I knew a business in which the girlfriend of one of the partners broke up the company, somehow got the money from her boyfriend, and then broke up with him.
• As mentioned above, a partner does not always pull his weight in the business. My mentor once brought in a minor partner, “Mike,” thinking that he would bring in some big contracts, but Mike did absolutely nothing. When the business was eventually sold, Mike was an instant millionaire and did nothing to deserve it.
• You also need to think twice before bringing family members into partnerships. I heard of a guy, “Jeff,” who was constantly being cheated out of money during board meetings by his own father-in-law. Jeff was a minority shareholder in a company and ran a profitable satellite office. His father-in-law, the majority shareholder, kept taking money from Jeff’s office for the main office to cover its “overhead.” Can you imagine the discussions that probably came up during Thanksgiving dinner over that blunder! Always remember: businesses usually last for only a short period of time while family is forever, and mixing the two is not always a wise idea.

These are only a few partnership horror stories and things that can be learned from them. The ultimate lesson is to be careful, think of possible “worst-case scenarios” should things go south, and work out as many potential problems as possible before the business is officially underway.

Can Partnerships Be Successful?

With all of those cautionary tales being said, can a partnership be successful? Of course it can, if the partners are compatible and complement each other. My uncle was in a partnership in which one partner had an invention, a second partner was the investor, and a third, my uncle, was the salesman. (In a circumstance such as this, the investor usually has the majority share in the business because they want to control where the money goes.) Everybody in the partnership did their jobs, and it turned into a successful company. So, yes, a partnership can work….it just takes the right combination of personalities and skills.

Do you need practical advice for running a business? Maybe some customizable business forms to help with day-to-day operations? My book, A Sure-Fire Microbusiness Guide can provide that and more. Check it out on Amazon and wherever books are sold.