Starting a small business can be a crazy adventure. It’s sort of like driving to a destination you’ve never been to before. But if you’re like me, a road trip isn’t as much fun to you without a co-pilot, and when you’re starting a business, that co-pilot is your business partner.
As an attorney that works with entrepreneurs, I’ve personally seen that small businesses can really thrive with the right people working together.
A good business partner will celebrate with you during the highs, encourage you during the lows, and keep it real with you through it all.
I know this because, in addition to working with entrepreneurs, I also happen to have a pretty fantastic business partner, myself! I recently started a small branding agency, Hot Fire Social, alongside my fellow attorney Steph Trejos, who I met while working at the San Diego law firm, wilkmazz PC. Although we’re still navigating the ins and outs of what our partnership will look like, we have a solid friendship to grow from and a bounty of legal knowledge between us (and our fantastic mentor, Sam Mazzeo) to consider.
So, I’d like to share some wisdom with you! What follows is a mix of ten legal questions and personal considerations Steph and I suggest you mull over if you’re thinking about taking on a business partner.
The Legal:
1. Are Either Of You Bound By Any Contracts?
Before you get started, double check that you and your partner are not bound by any non-compete or non-solicitation agreements from former employers. This is a consideration to make if either of you were recently, or are currently, employed. To determine whether or not you’re bound, make sure to read carefully through your employment documents, or ask a word ninja for help translating the legalese in those employment documents (that’s right, attorneys shall hereinafter be referred to as “word ninjas”).
2. Are You on the Same Page When It Comes to Forming a Business Entity?
If you’re not bound by any contracts, you should move onto discussing what type of business entity will work best for your needs. Confused by what I mean by “entity”? That just means the form of the business! Will you be an LLC? A corporation? Nonprofit? Or perhaps you feel more comfortable being a general partnership. Before settling on anything, consult with your CPA (because eek, taxes!) and your attorney (now an entity ninja, if you will) about which entity is right for you.
3. How Do You Want to “Split” the Business?
You’ll also want to discuss what percentage of ownership you each have in the business. Once you’ve figured out who owns what, commit these numbers to writing in a partnership agreement, operating agreement, or shareholder agreement (the name of the agreement will depend on which entity you and your partner decide to operate as). Again, consult an attorney for help with this!
If you don’t document your decision in writing, the law will presume there’s a 50/50 partnership.
You’ll want to include a percentage of ownership provision (especially if one partner plans to contribute through sweat equity), and don’t forget to include how profits and losses will be split in the agreement, because this goes hand-in-hand with ownership. Unless otherwise specified in the agreement, profits and losses will be allocated by the percentage of ownership. And keep in mind that this decision will also have tax implications, so be sure you have a CPA cued up for that conversation.
4. What Are Each of Your Roles and Responsibilities?
Decide from the outset what each person’s specific roles and responsibilities will be. Discuss with your partner: Who will be managing the day-to-day? Will they be given additional compensation? How will big decisions be made for the partnership? Having this decided and documented in the agreement keeps everyone on notice for what their job duties do or do not include.
You should also consider who can “bind,” or obligate, the partnership in any contracts that are entered into either on behalf of the business or by each partner. If the agreement is silent on this, it means that any partner has the right to bind the partnership in any decision, without the consent of the other partner or partners. Yikes!
5. Can You Have Hard Conversations with Each Other?
No one likes having hard conversations, but sometimes they’re necessary. You need to know upfront if you feel comfortable discussing difficult subjects with your partner, because if you don’t feel comfortable in the honeymoon stage, you definitely won’t feel that way when the going gets rough.
Some legal issues to discuss ahead of time include how you plan on modifying the agreement, what to do in the case of a dispute, and what happens if you need to dissolve the partnership. This is obviously not an exhaustive list of what you’ll need to be honest with each other about over the course of the partnership, but it’s a good jumping off point.
The Personal:
6. Do You Communicate in a Healthy Way?
In any good partnership, there needs to be communication. In a great partnership, there needs to be healthy communication. For example, when your partner gives you constructive feedback, will you be able to handle it without getting defensive, or will you get stuck in the pattern of “right fighting”? Side note: shout out to my therapist, who taught me what right fighting is (a.k.a. being overly emotional or angry when people do not agree with you)! This might take some soul searching, but –
The bottom line should be that when you think of your partner, you feel admiration and respect for them.
I sure do! And because I feel that way about my partner, there’s motivation to communicate in a way that pushes us forward together, and not apart.
7. Do You Trust Each Other?
It goes without saying, but trust is ESSENTIAL. One of the big reasons you’re probably thinking of partnering up is so you can delegate. But is it worth it to delegate if you don’t know if what you’re asking for will be done correctly or ethically? Are you sure that the tasks you want to delegate are going to be acceptable to your partner, or will it feel like you’re treating them as an employee (and vice versa)? Also, would you want to share a bank account or book of business with an untrustworthy business partner?
As a slight detour back to legal land: your partner will, by default, have the ability to take action for the business that can affect you. For instance, if you didn’t form a business entity and are in a general partnership, you face unlimited personal liability. Because of this, if your partner has a lapse in judgment, you are just as liable for any damages as your partner is. Not good.
8. Do You Share Values?
When Steph and I decided to start a partnership together, one of the first things we did was sit down and list out the core values of our partnership, and we suggest you do the same! It might seem pointless to make this list now, but when the going gets tough, these values will act as a compass, guiding you back to what you originally wanted your business to reflect.
As you’re thinking about this, you should also consider how circumstances might change in the future. For instance, does your partner plan to do this forever, is it a stepping stone to something else, or is this business only temporary until his or her personal life changes? It’s important to talk out these possible situations because those values you set might mean different things to each of you depending on where you’re at in life!
9. What Are Each of Your Strengths and Weaknesses?
Be honest with yourself about what types of people you work best with. Are you more productive and fulfilled being surrounded by people just like you? Or do you like to be challenged by those with a different perspective? There’s no wrong answer. Just know what works for you and look for that in your partner.
For instance, I’m the first to admit that I tend to get pessimistic when I’m overwhelmed. But Steph is like a puppy with a clipboard: she keeps me happy, AND organized. I love that, and I also love the imagery I just created.
10. Do You Like Each Other?!
Last but certainly not least: do you like each other?! Remember, this is someone you’re going to be spending a lot of time with, having a lot of conversations with, and potentially eating a lot of nachos with. Or at least, that’s how it was in our case. You need to like the person you’re partnering with, so consider why you’ve chosen to partner with them in the first place. If you realize you’re not fangirling hard over your partner, it might be time to take a step back and think about what you’re getting into.
I hope you’ll walk away from this list with a better idea of what you should look for in your dream partner. Questions? Comments? Wanna talk about how cute a puppy with a clipboard would be? Send me or Steph an email at liv@wilkmazz.com or steph@wilkmazz.com! We’re always happy to chat.
Photos by Kate Spencer Photo