6 Ways To Protect Yourself When Forming A Business Partnership
There is no point in entering a business partnership if you believe it will end as a disaster. Naturally, business partners don’t go into this decision with such terrible things in mind. As a result, most partnerships are discussed lightly, without much planning, with champagne glasses, and with no legal counsel.
This is very wrong. While you shouldn’t start a partnership thinking it will be doomed from the very beginning, this should not prevent you from being smart about it. Many partnerships that started out this way ended with friendships ruined forever, professional relationships ended in devastation, and entire businesses failing to rise up again.
Below you can check some of the things to look for before forming a business partnership.
1. Determine the Roles in the Business Partnership
One essential step to take when creating your partnership is to discuss the form of the business, roles of each partner, as well as the details regarding the decision-making process. Furthermore, there is the matter of the roles and responsibilities you will assume in this partnership, all of which comes down to delegating tasks and setting expectations.
2. Get Great Insurance
With such a grand variety of different insurance types offered on the market, it is no wonder that you find this part to be challenging. Basically, you want to get the best and most including insurance your money can buy. Ideally, this insurance should include the following:
Directors and Officers Liability
This insurance protects the Board of Directors and the management team from suits related to employment and shareholder suits.
The crime coverage insurance protects your business against fraud, forgery, theft and computer fraud.
Get this insurance for the key players in the business partnership – the founders and the partners.
This is a type of insurance that can save your entire business in the case of omissions and errors in privacy, intellectual property, or negligence that can cause loss to other parties.
Some insurance types are even required by law, but this is not something you should limit yourself to if you want to be as safe as you can.
3. Have an Exit Strategy Ready
Ideally, you won’t ever have to use the insurance or split your business partnership, but who can know what life brings? Something an unexpected, such as the death of a partner, a forced company dissolution, or a decision to sell the company can ruin all the expectations you set at the beginning. This is not a reason to back off this action, but it is definitely a reason to be smart and plan your exit in case it happens.
Gather your financial and legal advisors to draft the documents that detail what happens in such instances. Simply plan for a situation when your business relationship has to be terminated beforehand to keep things smooth and out of court.
4. Find a Way to Track the Partnership
You shouldn’t be obsessed with tracking what your partners do at all times, but it is only smart for you to want to practice total transparency. The advances in technology make this really easy, so all you have to do is track the assets of the company and make sure they are used properly. Check the sales, track the business activities, and schedule informational meetings with everyone included as often as possible.
5. Outline the Compensations
You already created a plan for the roles and the workload, but what about compensation? In most business partnerships, the profits are split down the very middle. However, if your business partnership is not made of equal partners, you should definitely consider taking this step before you get into the business.
As early as possible, choose who takes which role and what compensation. Include provisions and consider the option of buying out partners beforehand. Basically, make sure every single money matter is handled before this partnership starts.
6. Put a Limit on the Debts
Before you get into this partnership, it is smart to put a provision or a limit debt in writing. This means that any partner in the business has a limit as to how big a debt they are allowed to tie the company too. This, of course, should be determined and approved by all people included in the partnership.
There’s a good reason why in the world of business, partnerships that end are referred to as a ‘business divorce’. Divorce in business partnerships is costly, emotionally charged, protracted, and basically terrible for both sides. Thankfully, it is much more avoidable than traditional marriage. If you protect yourself ahead, you can enter a partnership without a single worry in mind, prepared for what might come. Even if it never does.
These were some of the steps one should take care of while getting into a business partnership.