How to Form a Business Partnership
Comprehensive step-by-step procedure with tips, best practices, resources and document templates you will need.
Starting a business or planning to expand an existing business can be a heavy burden. Many entrepreneurs consider bringing on a business partner – be it another company or someone who can balance the strengths and weaknesses, has better connections, and/or brings helpful experience to the team. If you are considering finding a business partner, check out the steps below.
Know the Pros and Cons
Partnerships have different classifications and legal requirements. Partnering with another company is different from adding a new individual (shareholder or partner) to your team. While a general partnership ensures equal access to profit, decisions, liability, and a helpful tax set-up, each of these pros can be used against a partner, especially if debts and lawsuits pile up against one of them.
TIP: 1) First determine what will be the role of this new partner; will it be another company acting as a distributor or reseller? Or is it about adding a new individual to your management team, essentially adding a new “owner” or shareholder to the company?
2) Do your research on LLCs, corporations, and the different kind of partnerships (like distributor, reseller, supplier, franchise, dealer, etc) before signing a deal as this is one of the most important and impactful contracts you will sign for your business.
Checklists: Partnership Agreement, Drafting Joint Promotion Agreements.
Agreements: Joint Venture Standard, Joint Venture Detailed, Reseller, Manufacturing & Distribution, OEM Distribution & License, Supply, First Supply, Strategic Alliance & Supply, Product Supply, Dealership, Franchise.
Find the Right Person / Company
What kind of partner do you want and need? Look to your friends and family, business contacts, networks, online sources like Upwork.com and community organisations like your local Chamber of Commerce.
TIPS: 1) Analyse your competitors; do they have that ‘special’ partner that seems to do wonders for their business, be it a seasoned executive, a distributor, a reseller, a supplier, etc?
2) Spend time with your potential partner(s). Meet in different contexts and occasions, get to know the potential partner(s) and ask for references.
3) Know your own strengths and weaknesses before vetting someone else.
Worksheets: Strengths & Weaknesses, Management Audit, Evaluating Management Performance.
Define Your Vision and Goals
If your potential partner’s goal is to start a chain and your goal is to focus on one big business, you might not want to form a partnership. The vision and goals must be perfectly aligned, or chances of success will be slim.
TIP: Meet and chat to discuss all the important issues. Write everything down.
Checklists: Organisation Wide Goals.
Define Roles and Leadership
Assign clear roles and responsibilities, along with objectives and deadlines (if relevant). Also discuss what happens if goals are not met by one of the partners. Determine who will have the ultimate leadership power – a 50/50 split is not always good, especially if the partners are not bringing elements of equal importance to the table.
TIPS: If you find you cannot reach a business agreement on something, someone needs to have the final say. If you want to avoid a blatant 40/60, consider a plan for locked disagreements: an intermediary, role of the dice, etc.
Worksheets: Employment Contract.
Draft an Agreement
Keeping in mind all the above-discussed things, draft an agreement that is a win-win for both parties. Detail everything, including an exit strategy should things go south.
TIP: 1) Check out the legalities carefully for things like what happens if your partner dies, gets sick or disabled or is otherwise unable to continue his or her duties.
2) Remember that it is critical you establish the appropriate form/type of partnership considering the business relationship you are putting in place.
3) Hiring a lawyer to review this legal agreement might be a good idea as it will be a very important document for your business.
Agreements: Joint Venture, Joint Venture (Detailed), Limited Partnership, Limited Partnership (Detailed), Offering memorandum Limited Partnership, Partnership Agreement (Short Form), Partnership Agreement (Long Form), Option to Acquire Partnership Interests, Exclusive Distribution, Distribution Software & Multimedia, Distribution Software, Distribution Software (Exclusive), Distribution Software (Exclusive & Long Form).
If you are forming a business for the first time or expanding, there are still a lot of legalities to keep in mind, such as registering your name, obtaining permits from the government, registering your type of business, etc. Check with your local tax office for exact details.
TIP: Check our processes on “How to Start a Business” and “How to Incorporate a Company” as they contain some useful information if this partnership is resulting in the creation of a new entity. Depending on the circumstances, you might want to publicize or announce to some selected parties, your new partnership.
Press Releases: New Partnership / Collaboration, New Distribution Channel, Announcement of Business Merger, Announcement of New Area Representative, Announcement of Partnership Buyout.
Have monthly meetings to look over the partnership. If things are not working well, consider breaking free or re-organising your business structure.
TIPS: Good communication creates longer-lasting partnerships. Work on being transparent, honest, and humble.
Correspondence Notice of Intent to Exercise Option(s) to Acquire Partnership Interests, Notice of Dissolution (Partnership).
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