A middle-aged man, wearing a suit and tie and facing the camera, reaches across a desk and shakes the hand of a younger man who wears glasses and faces away from the camera. Also facing away from the camera is a man with white hair and a white beard, who sits to the young man's left.
As with any other partnership, a business partnership should be built on shared values and common goals. — Getty Images/pixelfit

There are a lot of advantages to forming a business partnership. It’s an opportunity to combine resources, and that person likely has skillsets you don’t possess. Here are six things you should consider before choosing a business partner.

[Read more: Pros and Cons of Business Partnerships]

Make sure you share similar values

One of the most important aspects of a good business partnership is shared short-term and long-term values. This doesn’t mean you have to agree on everything but too many disagreements can hurt the business over the long term.

In many ways, a business partnership is similar to a marriage. You need to have shared values and commit to communicating with one another through all of the ups and downs of running your business.

Set clear expectations from the start

There’s a lot of work that goes into running a small business, so you need to clearly outline the roles and responsibilities of both partners from the start. It can be helpful to outline a job description for both partners just like you would in a traditional job.

How much time do both individuals have to commit to building the business? Are both individuals working on the business full-time or does one person still have a day job? How will you measure each person’s contribution to the business?

Outline what each person will contribute in terms of time, money and responsibility. Clarifying these expectations from the start can help you avoid problems later on.

Outline how you’ll manage business finances

The goal of any business is to generate a profit, so it’s important to outline how you plan to manage business finances. This can be tough for some people but it’s important to talk through your ideas about money from the start.

Here are a few things you’ll want to consider:

  • Will both partners contribute personal income toward growing the business?
  • Are you comfortable taking on debt?
  • How will you manage the business finances going forward?
  • Once the business starts generating a profit, will you take a salary or focus on reinvesting in the business?

You need to have shared values and commit to communicating with one another through all of the ups and downs of running your business

Decide what type of legal partnership you’ll choose

Next, you’ll need to decide on your legal business structure. There are three main types of partnerships you can choose from: a general partnership, a limited partnership and a limited liability partnership.

The advantage of choosing a general partnership is that it’s fairly easy to set up. You don’t have to file with the state and there are no ongoing fees to pay. However, this type of partnership provides very little liability protection to both partners.

In a limited partnership, at least one partner has unlimited liability. The other partner has limited liability so their personal assets cannot be tied to the business. This type of partnership is typically chosen when both partners have different levels of involvement in the business.

A limited liability partnership limits each partner’s financial responsibility to the business. This structure will provide the most protection to both partners.

Decide how you’ll handle partnership dissolution

Even the best business partnerships probably won’t last forever and when the time does come for the partnership to end, emotions will likely be running high. So decide how you’ll handle partnership dissolution from the start when both parties are in a neutral place.

If one partner decides to leave, how will they be compensated for their time, resources and involvement in the business? If the business is eventually sold, how will you divide the proceeds from the sale?

Take some time to discuss the different scenarios that could happen and how you would handle them. This will give you the best chance to end your partnership on amicable terms and in a way that’s best for the business.

Have an attorney draw up legal documents

Finally, even if you and your business partner agree on everything, don’t leave it at a verbal agreement. Make sure to consult with an attorney for legal advice.

An attorney can help you work out an agreement that both parties understand and agree to. It may feel tedious at first, but taking this extra step is the best way to protect the interests of both partners and do what’s best for the business.

[Read more: Legal Agreements for Family-Owned Businesses]

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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Published November 05, 2020