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The perfect business partner -- nobody

Pick the perfect business partnerWhen it comes to forming a partnership, Tom Culley has seen the best and the worst of it firsthand.

Three years ago, the syndicated business writer needed help to form a cottage industry around his resource book, Beating the Odds in Small Business. Like many of his small-business readers, Culley naturally thought to enlist an old friend with a similar MBA background as his partner in the venture.

It didn't take long for things to fall apart.

"After three or four months, it was really fraught," he recalls. "What I realized was, I knew nothing about this guy's work habits; everything about his work habits were totally unacceptable to me. Could I have found that out before? I don't know. I don't think so."

Although the friendship survived, the partnership died on the vine, taking the new venture with it.

But Culley says his latest creation, an online resource called businessalone.com, has succeeded because his new partner is completely different in skills and experience from Culley. He even lives in another city. They only met recently at a Denny's because they thought they should.

"He can't do what I do, and I can't do what he does. We're in a state of total mutual dependency," says Culley. "And that wasn't true in the previous partnership. Your skills must be such that not only do you complement each other, but you actually depend on each other. It can't be one partner needing the other. It has to be mutual."

"It's the toughest of relationships," Culley admits. "You just keep re-learning it."

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Do you really need a partner?
If taking on partner is so rough, why consider it at all? A solo entrepreneur might form a duo for any number of reasons.

You may wish to bring in specialized knowledge or skills such as marketing or technical expertise, obtain patents or new products, or simply provide an infusion of capital to your company.

You may want someone to share in the expense of launching your business, shoulder some of the workload or handle the day-to-day management.

And because a certain amount of loneliness comes with the territory when you're self-employed, a partner may look like a way to lessen the isolation.

But the real question is: Are you willing to divide your earnings, forfeit your autonomy and potentially place your company at risk in exchange for what you hope a partner will bring to the mix?

Not always a good idea
Martin Paskind, for one, advises against it. The retired Albuquerque business lawyer has seen lots of partnerships form and fail in his time. He estimates the odds of succeeding at 1 in 10 for passive investment partnerships, slimmer for working ones.

"I would venture to say that all business lawyers think that partnerships are a bad idea in the great majority of cases," says Paskind.

"Anytime you're setting up a business, you have to consider its relationships with its suppliers, with its customers, and the relationships between the people who own the business," he notes. "Partnerships raise a lot of practical issues and they raise serious legal problems, as well."

General partnership problems
A general partnership, the type most common in small business, makes each partner equally and personally liable for the company's debts and the business activities of the other partner. That means that should your partner drain the company account, you're on the hook not just for half, but for 100 percent of the loss.

General partnerships, unlike corporations, are not taxed as an entity, so each partner is typically responsible for individual, state and federal taxes, including self-employment tax. That's right, you could even wind up paying your partner's income tax.

Paskind says that from a legal point of view, the risks of a partnership far outweigh the benefits in most cases.

"Small-business people can't ever forget that one of their creditors, probably the worst of the lot, is the IRS. And you don't get any protective value from a partnership," adds Paskind. "Say you have a couple of guys and each of them has a drawing account but one of them is not really handling his taxes right, both partners owe $25,000. That's not exactly joy to the world. It doesn't have to be the result of bad faith, by any means."

Would he then consider a partnership only as a last resort in business?

"I wouldn't characterize it as a last resort," he says. "I would characterize it as no resort."

Partner pointers
Despite the potential legal landmines, business partnerships still form every day. How can you increase the odds that yours will succeed?

Jane Applegate, syndicated columnist and executive producer of SBTV, has some tips.

"Some of the basics are, you want to complement your weaknesses with a partner who is strong in the areas you're not," she says. "So if you're a great sales person but you hate keeping the books, consider a partner who is very comfortable with the bookkeeping and the record keeping. If you like being on the road and want to do business development and sales, it might be good to have a partner who likes to stay in the office."

Also try to conduct a thorough background check, even if the person is a close friend.

"Speak to people who have worked with them before," she advises. "Make sure they have good references and they're not a maniac that their former partner tried to kill one night."

Culley points out that both partners must be open, candid and committed to frank communication for the relationship to stand any chance at all.

"You can't have one of the two most important people in the business have some serious knowledge weaknesses or execution abilities. If those are concealed and come out six months later, it very likely will blow the business apart. You have to put your cards on the table," he says.

That's doubly true in unequal partnerships, especially if one partner provides most of the financing. "It's difficult to be honest and frank if one of the parties is putting up the money," Culley notes.

Three thumbs down
So what's the spot poll on partnerships?

"It's probably the worst form of business ownership, as far as I'm concerned," Applegate says.

"A straightforward, unmitigated partnership is probably the worst idea," Paskind says.

"Where a partnership situation is so flawed is, once you find out there's something wrong with it, of all the arrangements you could set up in business, you suddenly have the total frustration of a defect within your company about which you can do nothing," Culley says.

Three experts, three thumbs down for general partnerships.

Examine all the options
Still, if you must proceed, Paskind suggests at least looking into the host of structural options available to determine which one best protects your personal assets. They include limited liability companies, limited liability partnerships, professional corporations, limited liability professional corporations and S corporations.

And be absolutely sure to commit any partnership agreement to paper with your lawyers.

Spell out such things as each partner's responsibilities, salary, draw, percentage of profits, company mission and money invested upfront. Because many states consider a partnership dissolved upon death or withdrawal, you'll need to write in special terms to keep the business in operation after the death or disability of a partner or in the event one partner wants out.

Jay MacDonald is a contributing editor based in Florida.

-- Posted: May 11, 2001

 

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See Also
Choosing a business structure for your small business
Your business structure determines how you take money out of your till
What to do when a business partner leaves
Tax impact of a partnership break-up

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