Five things to consider before entering into a business partnership
There are many considerations to make before entering into a business partnership. These considerations include legal advice, tax implications, and personal and business experience. By the end of this article, you’ll have known what a business partnership is, the types and benefits of a business partnership and things to consider before entering into a business partnership.
Entrepreneur.com defines a business partnership as a legal form of business operation between two or more individuals who share management and profit. Another definition of a partnership is a type of business where persons agree to carry on a business in common with a view of sharing profit. The agreement for partnership does not have to be in writing before it can exist. However, documenting agreements is more beneficial in business relationships.
Types of Business Partnerships
General Partnership: A General partnership is the easiest kind of partnership to establish as there are no formal registration requirements or compliance hurdles involved. The partners agree on the terms of the partnership, and there is no limitation to each partner’s liability under a general partnership. Where parties do not agree otherwise, the partnership will be dissolved upon the death or bankruptcy of a partner. It is also important to note that under the Nigerian law, there is no formal requirement to set up a partnership business.
Limited Partnership: These partnerships are formal business entities authorised by the state. They have at least one general partner fully responsible for the operation of the business and one or more limited partners who contribute capital but do not actively manage the business. Limited partners share the company’s profits but can only lose as much as they have invested in the business. Limited partners invest in the business for financial returns and are not responsible for its debts and liabilities beyond the capital contribution made into the business.
Limited Liability Partnership (LLP): An LLP is a body corporate formed and incorporated as a legal entity separate from the partners. The aim of an LLP is to reduce legal liability on the partners by identifying the LLP as a legal personality.
Read more on types of business partnerships in Nigeria here.
5 Things to Consider Before Entering Into A Business Partnership.
Entering into a business partnership can be one of the most rewarding, satisfying and exciting experiences you could ever have. There are so many benefits, some include- more capital to grow the business, sharing of workload/responsibilities, better decision making processes, access to skills and experience. However, before entering into a business partnership, it is essential to think about the risks and responsibilities carefully. Here are some things to consider before entering into a business partnership
Value alignment is vital: It is common for people to compare a business partnership with marriage. This is because business partners should be compatible. They should be an agreement on the non-negotiables of the partnership and a commitment to communication between both businesses.
Determine the roles and responsibilities of each partner: The expectations from both partners should be made clear at the beginning. It is best to outline what each partner will contribute in terms of time, money and responsibilities. Doing this can help avoid problems that may arise in the future.
Decide on the type of partnership to be used: You will need to decide on your partnership’s legal business structure, i.e. what kind of partnership to be used. Refer above to learn about the various types of partnerships and which will work best for your business.
Decide how partnership dissolution will be handled: Make a plan for how the partnership should be dissolved if it has run its cause or is simply no longer mutually beneficial. This is totally fine as even the best business partnerships come to an end. In the plan, decide how compensation and the finance-related issues will be resolved in that instance.
Consult with a legal practitioner: A solid business partnership is backed by a written agreement. It is not enough to verbally agree. Partners should be able to resolve any issues that arise by referring to the written agreement. An attorney can help you work out an agreement that both parties understand and agree to. It may feel tedious at first, but taking this extra step is the best way to protect the interests of both partners and do what’s best for the business.
Although your business stands a lot to gain from a business partnership, it could also be a decision that could negatively impact your business if not well thought out. We advise you to consult a legal practitioner before entering into a business partnership.