Business partnerships can be structured in a number of different ways, however the theme that runs through all partnerships is that a partnership is constructed with two or more individuals who own a business. The way business partnerships are structured is important, not only for an entrepreneur who is looking for a business partner to help make their dreams a reality, but also for the investor themselves.
Without proper planning and thought an investor could open themselves up for more than they had bargained for, as in some cases additional liability for losses can rest with all partners, not just the entrepreneur.
For some small business owners, they prefer to work as sole proprietors since they want to handle the day-to-day operations themselves, and do not want to have to consult another individual.
In fact, often the idea of self-employment is the reason why some entrepreneurs launch their own business themselves. So, the thought of teaming up with someone else, isn't always the first preference.
Even so, there are benefits from forming a business relationship with another third-party. One of the main reasons is that it can be hard to finance a brand-new business entity with just your own personal income, and it can be hard to secure financial assistance without joining up with another company, investor, or partner. A business partner can help fund the business and provide an important injection of cash into the organization.
Another reason why some individuals form a business partnership is so that they can benefit from different skill sets. It can be difficult for one person to be able to handle all business operations themselves without outside support, so joining up with someone who brings useful knowledge and skills to the business can help the business become more profitable and successful.
When it comes to incorporation as a business, there are a range of different partnership structures that can be set up.
General partnerships - here all members of the business partnership share an equal role in how the business is run. Therefore, an investor who is looking to become a general partner typically is a person who is interested in the long-term success of the business and wants to provide support and input into the running of the company.
Entrepreneurs who attract this type of investor need to be clear in their mind that they are looking for a partner who will provide support and offer their opinion on how to run the company.
Whilst profits are split equally between partners, liability for losses are also split between all parties, therefore it goes without saying that not all investors or entrepreneurs are interested in this form of partnership.
Sleeping Partnerships - business partnerships that have a ‘sleeping’ partner are partnerships where the investor partner has invested money into the company but offers no support or direction on how the company is run. Therefore, a sleeping partners main and only concern is making money from the business investment.
For entrepreneurs this form of partnership obviously has many benefits as the way the company is run remains in control of the entrepreneur, however the downside for the investor at least is that they can still be liable for losses that the company runs up.
Angel Investors can be both sleeping partners and 'active' partners in your business. The reason for this is based around the level of involvement that the angel investor themselves wishes to involve themselves in with the businesses that they invest in.
While an angel investor will get a share of the partnership equity when they invest in a business, some investors prefer to remain as a silent partner. Often this is because they are busy and do not have the time to work on individual businesses. In many cases these individuals have invested in multiple business venture, so their time and resource are limited. Other angel investors like to take on a more hands-on role and can act in mentorship roles.
Limited Partners - as the name suggests the partner's involvement within the business is limited and their liability is also limited to the amount of investment they have made in the business. The general partner tends to control the business and make all the decisions. This means that these investor types tend to be passive investors and these individuals will handle their own personal tax returns.
Limited Liability Partnership (LLP) - this is another but somewhat complex way to construct a business partnership, however these should also be considered when going into business with another individual as this form of partnership arrangement has been constructed specifically with outside investors in mind. All partners in this business type have limited liability so the distribution of debt is shared between all individuals, but is again, limited.
Limited Companies - these are perhaps a better way for entrepreneurs and investors to work together. The reason for this is that within this type of legal entity, ownership of the company and division of profits can be allocated in different ways, and any losses that a limited company creates belongs to the company and not the owners. This means that if your company is generating losses then the liability for those losses won't come out of your own personal bank account! The way you pay income tax is also different for a limited company, and this can have some benefits when it comes to paying tax.
In the United States for example, these are often refered to as a Limited Liability Company (LLC).
When it comes to forming a business partnership there are many things that you need to consider to ensure that the business runs smoothly. You might need to think of what the exit strategy will look like if either you or your business partner(s) want to exit the business. This needs to be done smoothly, but not everyone plans for it.
Depending on the business structure you will need to consider personal liability and ensure that there is a form of liability protection for all individual partners. Most people when they set up a new business think a lot about the partnership income, but less so about the partnership debts, and this is a mistake. Businesses aren't always profitable, especially when they are first launched, so understanding how the income and debt may be shared is important for success.
You will also need to consider how your business profits are shared between the partners within the business and how much of your own personal assets you will invest in the partnership.
You should also work out who has the final say on business decisions, or whether all partners are equal.
It is worth remembering to get a written agreement on all the areas of the business that concern the business partnership. It might feel fine to create some types of business partnerships on a mutual understanding, but if the worst happens, you should have your business structure documented properly- for both legal and potential tax purposes.
The Angel Investment Network can help entrepreneurs and new business founders find a business partner for the business. Our global network provides a conduit connecting entrepreneurs with angel investors and high-net-worth individuals looking to invest in new business projects that have potential.
If you're looking for a business partner that can provide investment and support for your business then simply sign-up to the Angel Investment Network, post details of your business and find angel investors looking to invest in businesses just like yours.
AIN helps investors and entrepreneurs build lasting and profitable relationships to build better businesses and brighter futures.