Entering Into A Partnership? 3 Things Small Business Owners Need To Know For Protection

Posted on: 28 September 2015

When it comes to small businesses, many owners tend to want to operate as a partnership rather than a corporation. However, not all small business owners and operators know how to adequately protect themselves in a partnership. Here are three things that you'll want to do to keep yourself protected when you enter into a business partnership:

1. Don't Overlook the Importance of a Written and Signed Agreement.

You may be entering into a partnership with your best friend of 20 years and know that you can trust him or her, but you should never go on that gut feeling or that friend's word. This isn't something little and trivial that you're dealing with. You are dealing with a huge investment and potentially your future. Protect yourself by having a partnership agreement drawn up and require that it be signed by yourself and any others who are wanting to go into partnership with you.

In this agreement, all roles, interests and expectations should be clearly defined. This can help eliminate any major disputes in the future as well as heartache. All partners that have read and signed the agreement will understand how things will advance and be resolved if there is ever a dispute. If they don't want to sign it or are offended by you even asking for it to be signed, then you should know that you are ultimately better off.

2. Make Sure You Guard Yourself From Debts of Your Partners.

While all partners will have certain ownership of business debt, there is a line to draw when it comes to these debts. In the agreement, make sure that it contains limitations on the amount of debt that one single partner can tie to the whole partnership without consenting with all partners first. Without this in the agreement, one partner can legally bind the entire partnership (and business) to a debt making you personally liable if unable to satisfy said debt.

Further, ensure that the business has adequate capital to cover all of its liabilities and take the time to invest in a solid insurance policy. Insurance should not be considered a luxury, as it is one of the best ways to protect your partnership and business as a whole.

3. Don't Forget to Formulate an Exit Strategy.

You never know what will happen. The future remains to be written. Therefore, you need to make sure you're protected in the event that one partner decides to leave the partnership and business or passes away. Usually, the remaining partners are offered the opportunity to buy the interest of the former partner. In the written agreement, make sure to outline the buy-out terms for this procedure to help make certain that things are fair when the time comes for something like this to actually happen.

If you're unsure how to go about writing your own partnership contract or need some advice, contact a business law attorney in your area for guidance. 

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