In a relationship, you may feel like you’re the one running the show while your partner does diddly-squat. Or perhaps you’re the one who’s in the limelight while your other half remains in the shadows. And then, maybe you both look out for one another and work well together as a team.
Many marriages are like this, but what about business partnerships? You may be surprised to find that they, too, have their ups, downs, challenges and opportunities, much like marriages. If you’re thinking of going into business with another (or more!), here are some things to consider before taking that big step*:
The Cons
There is a lot of risk involved in going into business together, which you should take into account. As with a marriage proposal or invitation to share accommodation, this is a large step that, once agreed upon, can be a challenge to dissolve.
• No written agreement is required to form a partnership—it can be formed through the actions of both partners. But if you appear to operate the business together, the law can hold you both accountable for business-related obligations.
• Without a written agreement, partners can’t determine their rights, liabilities, obligations or duties (except for what’s covered by provincial law), and the partnership must be dissolved if a partner resigns or dies.
• A partner can also require that the business be dissolved at a moment’s notice, or if she decides to leave the business the remaining partner may suffer financial loss. If the survivor wants to continue, she has to form a new company. All assets are at risk in a limited partnership, as well.
• Partners can’t take advantage of tax write-offs, group life insurance, disability or health benefits, and in the event of your partner’s death, you must purchase or inherit the shares of the deceased.
• Let’s face it—disputes and arguments can arise and cause difficulties within the partnership. And if it isn’t settled in writing, your solicitor will have to step in!
The Pros
In spite of the risks, there are definite advantages to forming a partnership. Sharing responsibilities, skills and contacts can give your business more than a boost in manpower—you also have someone who is as interested in your company’s success as you are.
• First, a partnership is very simple and inexpensive to set up, and it allows you much flexibility to structure it as you both see fit.
• Each partner has the opportunity to specialize in their own area of expertise—an ideal setup if your respective skills complement each other.
• It can make going into business with family and/or friends easy.
• Capitalizing a business is stronger and simpler when people put their resources and assets together—and, as a result, the borrowing power is greater.
• Even though you can’t take advantage of tax write-offs, there isn’t any tax at the partnership level—tax consequences are passed through to the individual partners.
Other things to consider
In addition to the pros and cons, here are five questions you should ask yourself before going into a partnership:
• First of all, do you even need to partner up? It may be that you or your partner may not even have sufficient funds to support such a venture; or one or both of you feel that having a partner would be more secure or comfortable, though this will only prove to be the opposite down the road. Try looking at alternatives, such as a contract for services between the two of you—if she doesn’t perform, you can terminate the contract and then freely engage someone else who can provide you the services you need.
• Is your business big enough to support more than one owner? If one of you works harder than the other and the level of compensation is not equally balanced, then maybe your business is too small for the both of you.
• Are you both compatible? Realize that you both may not agree on decision-making or on how to run the business. Your partner may make unilateral decisions on her own, may not work well with customers, vendors or employees, and may even have different values that impact the operation of your business. Maybe she doesn’t work as hard or proves to be weak in management and co-ownership skills.
• Are you prepared to share both profits and responsibilities equally? Unless you have an agreement to the contrary, you must be willing to share the profits. Also, you’re both legally responsible for the debts of the other(s)—if one of you defaults on a debt, the other has to settle it.
• Lastly, are you prepared to face risks together? There are more than just business issues at stake here. You need to also be aware of legal risks, especially if poor management and/or decision-making on one partner’s part exposes your company to matters such as “joint and several liability” (to be sued as a group, and/or be individually sued). Neither of you are free to just walk away and start up a new business if things don’t work out.
Still Want to Partner Up?
After you’ve thoroughly investigated your options, do you still believe that a partnership is the way to go? You’ve weighed the pros and cons, you’re willing to face (or take) risks, and you believe you know your partner inside and out. But just to be extra careful, it would be wise to take these crucial steps to protect yourself and your interests:
• You’re strongly advised to seek professional advice before going into a partnership, particularly with a close friend or family member. If you do partner up with a friend or loved one, be sure to keep your personal issues separate from the business.
• Draw up a formal, written agreement stating how the business will be run; how decisions will be made; how the proceeds will be split; rights and responsibilities of each; distribution of assets upon dissolution of the company; and the percentage of shares you each own (and how they can be disposed of). That way, you know what is expected of your partner and what you will get out of the partnership, yourself.
• Draw up a buy-sell agreement funded by life insurance and disability insurance. Each partner would have an insurance policy on her life paid for by the other partner(s). Upon the death or disability of either partner, the insurance company pays an amount equivalent to the value of shares owned by the deceased.
• Each partner must register with Revenue Canada as self-employed, and all should keep records showing business income and expenses. The partnership itself and each individual partner need to make self-assessment returns to the revenue agency.
• Contribute your unique skills—as well as a sense of humour.
• Make sure your friendship is strong enough to withstand your time together—you have to like being around the other person.
• Be flexible, respect each other’s ideas, listen to each other and talk out every single decision you both make. After all, without communication and trust, you have no partnership whatsoever.
Partnerships are not to be entered lightly, and all this information is not meant to discourage anyone. It’s to be used to guide you through the questions you should be asking each other and some of the steps you will need to take. To truly benefit from a partnership, you need to be aware of the pros, the cons and the awesome opportunities you offer each other.
* As this article speaks to legalities and taxes generally found in Canada, readers are advised to refer to those for their particular jurisdiction before proceeding.
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