Partnership Pitfalls: Look Before You Leap

Partnership Pitfalls:
Look Before You Leap

By Carol A. Thelen

There are both pros and cons to forming a business partnership. Here is why one business owner dissolved the partnership she had formed with a friend.

Starting your own business can be exciting, frightful, rewarding, stimulating and wonderful. It can also be one of the worst mistakes you can make. You might feel safer when starting your own business if you take on a partner. What a perfect situation, you think, because you only invest half the money and time you would otherwise need. However, taking on a partner can have many drawbacks. Remember too, that half the work means half the profits!

Legal and Tax Considerations

These two aspects of a business are somewhat intertwined. There are certain types of business entities that you can form that have different tax considerations.

Accountant. Consult with a CPA or accountant about the best way for you to keep records and file income tax returns. Some different business entities include, but are not limited to, S corporations and Limited Liability Partnerships. Each one is treated differently by the IRS and requires different tax forms to file. Check with your accountant about which entity will save you the most money on taxes.

Attorney. If you want to protect your personal assets from any business related lawsuits or claims, you will need to consult an attorney about the proper papers or insurance you must file to have this protection. Be sure that your personal assets are protected from any claims that might result during the operation of your business. This includes any actions your partner might take that affect your business.

Buy-Sell Agreement. A partnership is like a marriage and breaking up the partnership can be as difficult as a difficult divorce! For that reason, you need to draw up some sort of written agreement, such as a Buy-Sell Agreement, between the partners that addresses how business will be handled in the event of one partner's death or decision to leave the partnership or bring in another partner. Addressing these things up front will allow you to discuss possibilities and lay out a plan to handle situations that might arise further down the line.

Who Does What. Somewhere down the line, one partner will think that they are pulling more of the weight of the partnership than the other. If one person is spending frivolously or putting in less time than the other there can be some friction. Partners need to spell out exactly what each one will do. If that means keeping track of hours, then so be it. Set limits on spending, too. If the partnership needs a new piece of equipment, for example, determine a price range before one of you goes out to purchase it. Other things to consider are:

* Who will purchase supplies?
* Who will keep the books?
* Who will pack the orders or man the booth?
* Who will take the packages to the shipper?
* Who will answer e-mail and web site inquiries?
* Who will prepare all the correspondence, newsletters, handouts
and advertising?
* Who will pay the bills?
* Who designs the new products?

Even if you are considering becoming partners with your life-long friend, you should address these issues before they become problems. Having personal experience with a partnership, I decided the best thing to do was to get out after only eight months. Being a self proclaimed "control freak," I found it frustrating and unproductive. In addition, even with a good product and plenty of sales, my share of the profits did not equal the time, work and ideas I was putting into it.

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Copyright © 2003 Carol A. Thelen. Carol is the author of three books on machine quilting (all published by Martingale), including Professional Machine Quilting: The Complete Guide To Running a Successful Quilting Business (November 2003). A long-time teacher, Carol recently decided to stop teaching for a year and go back to her quilting roots of running a business from home (less traveling and less stress). She can be reached by e-mail.

For more about the legal and business pros and cons of partnerships, see the "A-to-Z Crash Course in Business Basics" section of Homemade Money: Starting Smart.

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