The Hostway Blog

How to Choose a Business Partner

If your business is going to be owned by more than one owner, the simplest business form to create and operate is a general partnership. Forming a partnership entails an agreement between two or more prospective partners. Whomever you choose to be a partner in any given business venture lies solely in what skills, attributes, or responsibilities this person will be contributing. A partner can be an individual, a partnership, a limited liability company, a corporation or a trust.

What is a partnership?

The flexibility of a partnership allows the business to operate in a manner that best suits the business needs at the time the business starts and later when the business has matured. Later, when the business has grown, new partners can be added, yet their management capacity can be limited to prevent the new partners from usurping the original partners. When a partner contributes capital to a partnership, the partner receives an ownership percentage in all assets of the partnership, not just in the property contributed.

All partners are jointly liable for the obligations of the partnership. Joint liability means that each individual partner will equally be held responsible for all of the obligations of the partnership. If there is an instance in which any one partner solely contributes to any betterment of the business, that business partner can collect the other partners' pro rata share of the debt regardless of whether or not the other partners are financially able to repay their share. If this is the case legal action may be required.

There are basically two types of partnerships:

  • General partnership — a general partnership consists of general partners who share the management of the entity and are personally responsible for the partnership's obligations.
  • Limited partnership — a limited partnership consists of two classes of partners: general partners and limited partners. The general partners manage the limited partnership and are personally responsible for its obligations. The limited partners are similar to shareholders of a corporation. They cannot participate in the management of the entity, but can only determine who will manage the partnership. The limited partners share in the profits of the partnership, but their losses are limited to the amount of their capital contribution.

How to choose a partner:

  • Take Your Time
    Get to know your potential partner. Find out who they are, what skills and experiences that have to offer and how you will work together to run your business. Be sure you choose a business partner who shares your values, spirit and vision.
  • Conduct a Background Check
    Check out the potential partner's background to find any past dishonesty, substance abuse problems or criminal violations before going into business together. You should also ask for a list of professional and personal references you can talk to before entering into any agreements.
  • Find a Partner That Can Bring Skills and Experience to the Business
    Don’t duplicate yourself. A good business partner should have skills that support and compliment your own. If you and your partner can bring a more diverse skill set to the business together, it will make the entire process of starting, managing and growing your business easier.
  • Choose a Partner That is Financially Stable
    Even if your partner is not contributing financially to the business, someone in the middle of a financial crisis may not be the best choice. Money, asset and time management skills are critical for small business entrepreneurs. You want to have a partner who has good business sense and clean financial history.
  • Involve a Smart, Experienced Lawyer Early On
    An attorney can help you build important information into a partnership agreement, such as how the work will be divided, what will happen if more money is needed and how decisions will be reached, as well as what will happen if one partner wants out. Having non-compete agreements in place is another good safeguard to protect proprietary information about your business.