Building Your Business Becoming an Owner Business Types How To Build a Winning Business Partnership By Darrell Zahorsky Darrell Zahorsky Twitter Darrell Zahorsky is an expert in search engine optimization (SEO) and marketing. He has worked for companies and clients such as Blackberry, ADP, and Subway. learn about our editorial policies Updated on September 13, 2022 Fact checked by Yasmin Ghahremani In This Article View All In This Article Have the Same Vision Define Roles Choose the Right Structure Anticipate Disputes Spell Out Financial Responsibilities Plan for How to Get Out Hold Partner Meetings Revisit the Agreement as You Grow The Partnership Agreement Frequently Asked Questions. (FAQs) Photo: Dan Dalton / Getty Images Partnerships are a simple way for two or more people to own a business together. There are several types of partnerships that differ in terms of who is liable for debts and lawsuits. You may want to form a partnership to test a business idea before committing to a more formal business structure. There are quite a few issues you should address with your prospective partner before forming a partnership. Attend to these issues before you start, and you have a better chance of a successful venture. Key Takeaways A partnership is a business structure that involve two or more people who are in business together. A successful partnership starts with partners who have the same vision for the business.As you create your partnership you should define roles, spell out financial contributions and pay, decide what happens when you have disputes, and discuss what happens when one or all parties want to end the partnership. Continue to revisit your partnership agreement as your business grows. Have the Same Vision For a partnership to be successful, all parties involved should agree on the same strategic direction for the company. If one partner wants to build a well-known national chain of retail outlets and the other partner only cares about earning a decent living, the business is destined to fail. Set a clear, agreed-upon course for the business that meets the needs of both partners. Define Business Roles and Responsibilities A winning business partnership capitalizes on the strengths and skills of each partner. Divide business roles according to each individual's strengths. For example, if one partner is strong in marketing, operations, and finance and the other partner excels in sales, human resources and leadership then split tasks accordingly. Binding agreement authority is the ability to enter into contracts with other entities. You might consider deciding if any partner has this authority, and in what scope. You and your business partner could split this authority based on the responsibilities you each take on. If your partner is responsible for procurement, they could enter a contract with a supplier without needing to confer with you. By agreeing who can make these kinds of decisions, you mitigate the risk of conflicts down the road. Choose the Right Structure The structure you choose for your business will dictate how you and your partner pay taxes for the business. Limited liability companies and general partnerships have different liabilities and tax responsibilities. Avoid the 50-50 Split It may seem logical and fair to equally split decision making. However, this kind of split can impair decisions. Instead of a stalemate when you can't come to a compromise, consider developing a way to overcome differences. If this is not possible, then consider using an outside source to weigh in on big-ticket disagreements. You may not want this source to have final decision ability, but see if they will analyze the situation and give you their opinion for a course of action. If needed, get more than one opinion. Anticipate Disputes There will be disagreements between partners. Not many pairs of people can agree 100% of the time. You should consider how you are going to handle disputes between each other, with employees, suppliers, customers or any other stakeholders. One way to deal with this is to include a mandatory arbitration clause in your partnership agreement and the contracts you make with other entities. Arbitration is the use of an outside party to determine the outcome of disagreements and disputes. Note Arbitration is a legally recognized method of dispute resolution. Binding arbitration means that all parties involved agree to abide by the decision of the arbitrator. Spell Out Financial Responsibilities You should decide with your partner how much each of you is going to contribute to setting up your business or partnership. If you are both already operating, the costs may not be as high as if you both needed to start out. Everyone has their own limit for tolerating risk. Financial risk can be more stressful than physical risk because it affects much more than your own safety. You should discuss with your partner how much financial risk you both can tolerate, and set limits. An example of risk could be the method that you choose to finance your business. There is generally more risk involved with debt financing than with equity financing (using loans to finance instead of issuing shares, venture capitalists, etc.). You may not have much of a choice at first how you finance your business, but be sure all parties understand the risks, and how much each person is responsible for. The type of business you put together will also dictate the risk that you assume. Creating a limited liability company keeps owners from personal responsibility for the debts of a failed business. When you create your partnership, you should discuss the expectations for pay. Note Most businesses do not generate profit within the first year or even the second year. The number one reason new businesses fail is that they don't have enough cash to pay the business' and owner's bills. Ensure you and your business partner know how you are going to make ends meet. Generally, in a partnership, the assets belong to the business unless specified in the partnership agreement. Partners will then own a percentage of the value of the company property based on the agreement. This is usually only a concern for businesses when they are closing out, and owners are working through who gets what. Plan for Buy-Outs, Dissolutions, and Exits Partnerships dissolve for many reasons. One partner may decide the partnership is no longer beneficial. You should include buy-out terms in case one partner wants to leave. You might consider adding a dissolution clause to the partnership agreement. If the partnership is not working out, it would be beneficial to have pre-agreed terms for splitting things up. An exit strategy is a plan if both partners should want out. This is can be accomplished by selling the company, or by selling all the inventory, assets, and interests a business has. Hold Partner Meetings A strong business partnership is built on open communication. Meet on a regular basis so you can share grievances, review roles, provide constructive criticism, and discuss future plans for the growth or direction of your business. Revisit the Agreement as You Grow Your business may grow over time as you and your partner work together. You may want to readdress your partnership agreement as your business grows. You may need to add more partners, include senior employees, and include expansion agreements. You could include this in your initial agreement, but it might be better to wait until you are in a position to consider growth and expansion. The Partnership Agreement It is simple to set up a partnership because there are no legal documents to file. A written agreement, signed by all partners, is a legal document recognized by law. Partnerships are often an oral agreement between two or more parties. Oral agreements can present problems in case of disagreements, even though they are legally binding. Instead, avoid potential problems by drawing up a partnership agreement. Your partnership agreement should include the following (at a minimum): Amount of equity invested by each partner The type of business How profits and loss will be shared Decision-making policies Partners' pay and other compensation such as bonuses Distribution of assets upon dissolution of the business Provisions for changes to the partnership or provisions for dissolving the partnership Parameters of a dispute settlement clause Settlement of the business in case of death or incapacitation Restrictions regarding authority and expenditures Expected length of the partnership It's always worth considering a business partnership structure when you find someone who complements your skill set and you know will add value to your company. These partnerships can be enjoyable and lucrative if the right foundation is cemented in the beginning. Frequently Asked Questions. (FAQs) What kinds of business partnerships are there? There are three types of partnerships. A general partnership (GP) involves partners who all have liability for debts and lawsuits. In a limited partnership (LP), one or more general partners manage the business and have liability, while other partners don't participate in the operations and don't have liability. Finally, in a limited liability partnership (LLP), all partners have limited liability. What's the difference between a partnership and an LLC? A limited liability company (LLC) with two or more members (owners) is treated as a partnership for income tax purposes. The main difference between an LLC and a partnership is that in an LLC, members don't hold personal liability for the company. In many partnerships, only limited partners are protected from personal liability for the company. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Small Business Administration. "Choose a Business Structure." Cornell Law School Legal Information Institute. "Alternative Dispute Resolution." Small Business Administration Office of Advocacy. "Small Business Facts." Internal Revenue Service. "Limited Liability Company (LLC)."