Pick Your Partner Carefully
Business-related acts of one partner can legally bind all other partners, so it’s essential to enter into partnerships only with people you trust. And it is equally essential that, no matter how much you trust your partners, you execute a written partnership agreement establishing each partner’s share of profits or losses, each partner’s day-to-day duties, and what happens if one partner dies or retires.
Pay Attention to Your Limited Partner Status
Limited partners’ liability cannot exceed their financial contribution to the partnership. As a result, a limited partnership offers two key advantages: It gives the general partner the freedom to run the business without interference, and it protects the limited partners if something goes wrong. Limited partners may choose to get more involved in a partnership’s daily operations, but they do so at their own risk. In the eyes of the law, their involvement may make them a general partner and strip them of their limited liability.
Put Everything in Writing
Any type of partnership should have all of the details spelled out and signed by all of the parties. Far too many friends and even family members have made the mistake of not putting everything in writing and ended up with strained relationships.
Take Advantage of Limited Partnerships
While some businesses function successfully as general partnerships, the advantage of a limited partnership is that the limited partner is not liable for the actions of the general partner. This is advantageous if you are backing a business financially or cannot put in the same time and hands-on commitment.
Consider Liability Issues
General partnerships have the problem of imposing liability for the debts and obligations of the business on the general partnerships. Consider setting up the business as an LLC, an S corporation, or a limited partnership where the general partner is an LLC or corporation.
Pick the Right Partner
Often, individuals find that they have partnered with someone who has a different set of goals or a very different manner of conducting business. Make sure you consider your potential partner’s manner of doing business, personality, and business goals prior to starting a partnership.
Capitalize the Partnership Appropriately
The lack of adequate capital for the projected operations of the business is a major mistake made by many partnerships. Prepare projected cash flow and income statements to determine what capital you should start with.