Forming a General Partnership? Avoid These Common Mistakes

 Posted on May 05, 2023 in Business and Commercial Law

Two heads are often better than one. In a business partnership, business owners benefit from multiple perspectives and skill sets. Partners share start-up costs and business responsibilities, have greater borrowing capacity, and are less likely to suffer from burnout.  

Co-owning a business with one or more partners can certainly be an effective business strategy. However, there are also pitfalls that partners must be aware of. In this blog, we will discuss some of the most common mistakes partners make that increase the chances of disputes and decrease the chances of long-term business success.

Mistake #1: Not Specifying Capital and Equity Divides

Many partnerships are formed between close friends, colleagues, or even family members. Consequently, partners may assume that there is no need to formalize all of their agreements. They assume that the partners will act in good faith and operate on an honor system regarding capital and equity divides. Unfortunately, this common mistake often leads to significant conflict and even legal disputes. All partnerships should involve a partnership agreement specifically stating how business expenses and equity are divided between the partners.

Mistake #2: Not Creating an Exit Strategy

The start of a new business venture is always exciting. You and the other partners may be full of ideas about maximizing profits, diversifying and growing over time, and fulfilling your vision.  However, it is also essential for business owners to consider an exit strategy. The last thing you probably want to think about right now is the possibility of a partner leaving or your business dissolving. However, planning for these possibilities is crucial. Your partnership agreement should include answers to questions such as:

• What happens if a partner is incapacitated by a serious illness?

• How is each partner's interest in the company valued?

• How is a partner paid for his or her stake in the company if they choose to give up their interest?

• Are partners allowed to sell their interest in the company?

Mistake #3: Rushing into a Partnership

Most entrepreneurs are aware of the grim statistics regarding startups and business ownership in general. Many businesses fail within the first few years. To give your business the best chances of success, it is important to resist the urge to rush into a partnership without taking the time to develop a thorough business plan, partnership agreement, and long-term strategy.

Contact our Cleburne Business Owners

If you want to set up a general partnership, do not rush into it without proper legal counsel. The skilled Hood County business law attorneys at Cain & Kiel Law can help you set up a partnership that gives you the best chances of success. Call 817-645-1717 for a confidential consultation to get started.

Sources:

https://www.forbes.com/advisor/business/partnership-agreement/

https://www.thebalancemoney.com/why-business-partnerships-fail-4107045