Business partnerships can be fraught with issues, but Ask ACE columnist Carrie Yardley offers advice on how to avoid pitfalls.
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Q: I’m partnering with another entrepreneur on a project. How should we set up the partnership?
ACE advises: You do not have to get married to go to the movies. The answer depends on whether your project is a collaboration expected to end when you achieve a common goal, or whether it is intended to become an ongoing business. The first — a date — would usually be referred to as a “joint venture,” which might or might not be a partnership. The second — a marriage — involves a business structure selected by investors as the best way to run a continuing commercial enterprise, which also might or might not be a partnership. Since you call it a “project” it sounds like a joint venture.
Above all you want to avoid creating a partnership by accident before you start incurring debt. Neither joint ventures nor partnerships require written documents; if you tell third parties you are a joint venture or a partnership they can believe you.
Partners in a general partnership are personally liable for the partnership’s debts. Without written documents, courts treat a joint venture as a partnership, which again means personal liability.
Before you start your project, and before you start drafting documents, you need to be very clear on:
- The project’s goal, and how you will know it has been accomplished
- Each member’s contribution (cash, goods and services)
- Each member’s pay-out
- How long it will take to complete the project
- If the project fails, how you will limit your personal liability
- What other risks might be involved (property, liability and so on) and how you would insure them.
The final documents might a be few simple agreements and a conversation with your insurer, or they might involve a master joint venture agreement, a new limited liability entity, milestone performance equity benchmarks and contracts with each of the founders covering their performance obligations.
Carrie Green Yardley, vice president of ACE, founded Yardley Esq. PLLC in 2015. The firm works with small businesses and owners on governance and transactions, from startup to exit. She can be reached at carrie@yardleyesq.com.