A community-based law firm serving businesses and individuals with real estate transactions, corporate law legal needs and planning for the future.

Avoid these 5 common partnership mistakes

On Behalf of | Apr 14, 2023 | Business Law |

The business formation process can feel overwhelming. When you’re eager to get your business up and running and earning money, you can be tempted to rush some early decisions. But doing so can be risky, putting you and your endeavor at risk. This can be especially true if you’re entering into a partnership.

Common partnership pitfalls

To best protect your interests in this type of business, you should know about some of the most common mistakes that are made so that you can avoid them. Let’s take a look at some of those mistakes here:

  1. Goals that conflict or otherwise don’t line up: Before entering into a partnership, you should make sure that you and your potential partners are all on the same page when it comes to your goals. If your goals are misaligned, then you could end up facing a lot of conflict later on that threatens the direction and viability of your business.
  2. Lack of clear expectations: A lot of partnership disputes arise when one or more partners simply aren’t pulling their weight, yet they’re receiving a share of the profits that is equal to that received by the other partners. You can try to avoid this from happening by clearly spelling out partner expectations in your partnership agreement.
  3. Unclear financial management strategies: How your business manages its finances can make all the difference in its financial stability. But if your idea of how to manage the business’s finances conflicts with that of your partners, then you might end up fighting over it. For example, before entering into a partnership, you might want to talk to the other potential partners about how comfortable everyone is with assuming debt and how much each partner is willing to invest in the business from their own savings and the income that they generate from the business.
  4. Choosing the wrong type of partnership: There are a lot of variations on the partnership business structure. You can create a general partnership, a limited liability partnership, or a limited partnership, for example. The one you pick could dictate the amount of liability that you take on and how much you’ll invest in the business. If you choose one without fully vetting your options, though, then you could be opening yourself up to more risk than you anticipated.
  5. Failing to define how dissolution will occur: Although you might hope that your partnership will last forever, you should always prepare for the worst case possible. Therefore, before you enter into a partnership agreement, you should specify how partnership disputes will be handled and how dissolution will play out should it occur. Here, you’ll want to address everything from partner compensation once they leave the business to how assets and proceeds will be divided if the business is sold.

Keep in mind that much of this should be addressed in a detailed, written out, and agreed to partnership agreement. If you don’t have this written document in place, then you might find yourself fighting over these issues without much guidance.

Make sure you know what you’re getting yourself into

Although you’re excited to get your business up and running, you need to take the time necessary to ensure that you’ve adequately planned everything out. After all, this is the only way to fully protect yourself and your business interests.