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What You Should Know Before Bringing on a Partner in Your Business

adding a partner to an existing business

Before committing to a business partnership, there are crucial conversations you need to have. A partnership, just like a marriage, requires open communication, mutual trust, and clearly defined expectations if you want it to thrive and last.

Rushing into one without laying the necessary groundwork of respect and alignment on vision and roles will lead to disillusionment, frustration, and, eventually, dissolution.

To set your partnership up for long-term success, here are five key things you should know going in.

1. Create an Operating Agreement

An operating agreement is one of the most important steps to take before finalizing a partnership. This legal document outlines the structure and rules of your partnership. It designates ownership percentages, establishes roles and responsibilities, and provides guidelines for decision-making and profit sharing.

A strong operating agreement also prepares for worst-case scenarios. It will explain what happens if a partner dies, becomes disabled, or wants to leave the partnership. Dispute resolution procedures will be outlined. Basically, an operating agreement legally protects all partners in situations that you hope will never occur. Don’t just create the document and set it aside – make sure all partners formally agree to and sign it.

2. Schedule Regular Partnership Meetings

Consistent communication ensures everyone is still on the same page. Aim to hold at least quarterly partnership meetings. This provides a forum for voicing concerns, aligning on strategy, and making sure all partners are still fully committed to the shared vision. Annual meetings are simply not enough in our fast-paced business environment.

Partnership meetings are the perfect opportunity to check in and get everyone’s perspective. Make sure you leave time for open discussion so any potential issues can surface. Addressing problems early keeps the partnership healthy and drama-free.

3. Agree on Profit Distribution

Profit division must be agreed upon upfront to avoid future conflicts. Will profits be split according to ownership percentage? What about partners who don’t directly generate revenue, like operations or technical experts? Does profit share shift annually based on that year’s contributions?

While not the most fun conversation, you must align on profit expectations early on. Revisit this topic regularly, as profit share methods may need to evolve as your business grows. Silent disagreements over profit can silently eat away at an otherwise strong partnership.

4. Discuss Adding Partners Later On

When launching a partnership, it’s easy to think your group will remain small and close-knit. However, many partnerships grow over time. Discuss how you will handle potentially adding partners down the road. Do all current partners need to approve new partners? Will new partners be given equity?

If you want to eventually attract investors, make sure all partners are comfortable with sharing ownership of the business. Thinking through growth scenarios now means you already have guidelines in place when the time comes.

5. Involve a Lawyer

Just like with marriage, having an experienced lawyer guide your partnership setup is wise. A lawyer can help properly structure your operating agreement and ensure you have strong legal protections in place. Don’t try to cut costs upfront by skipping professional legal advice.

A lawyer will also represent your partnership’s best interest if any disputes arise later on. Investing in legal counsel now will pay dividends down the road.

Bottom Line

Launching a healthy, ethical partnership requires transparency, communication, and proper legal protections. Don’t rush into a partnership blinded by excitement. Have tough conversations about structure, money, and scenarios before joining forces. Your partnership’s success depends on building a solid foundation first. Contact us to discuss what options you have to protect yourself.

Author Bio

Leila Shaver is the Founder of My RIA Lawyer, a law firm that provides compliance and legal consulting for financial institutions. With extensive experience as a securities attorney and compliance expert, she has served as Chief Compliance Officer and General Counsel to RIAs, BDs, and TAMPs with billions in assets under management.

Leila understands the challenges RIAs face and is committed to helping RIAs streamline their processes, mitigate risks, and ensure compliance with regulatory requirements. She received her Juris Doctor from Atlanta’s John Marshall Law School and is a West Georgia Young Lawyers’ Association member. Leila has received numerous accolades for her work, including the Carroll County Bar Association’s Outstanding Young Lawyer Award in 2017.

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