Setting up a business is a significant milestone, and one of the crucial decisions entrepreneurs face is selecting the right business partner(s). The importance of this choice cannot be overstated, as the success and longevity of a business often hinge on the strength of the partnership. A compatible partner can bring complementary skills, a shared work ethic, and a harmonious blend of personal and professional goals, all of which are critical for the success of your business venture. On the other hand, a mismatch may lead to conflicts, misalignment of objectives, and even the business’s downfall. This article explores how to choose the right partnership structure and key considerations when choosing a business partner.
To protect your business, ensure supplier contracts meet your business’ needs. Our free Commercial Contracts Checklist will help.
Types of Business Partnerships
There are several types of business partnerships: general, limited, and joint. Each type has unique advantages and disadvantages, and entrepreneurs must choose the one that best fits their business needs and goals.
| General Partnership | A general partnership is the most common type of partnership, where two or more partners share equal responsibility for the management and liabilities of the business. Advantages: + easy to set up and operate; + equal sharing of profits and losses; and + flexibility in management and decision-making. Disadvantages: + the law holds partners jointly and severally liable for debts and obligations; + partners’ personal assets are at risk to satisfy partnership liabilities; and + limited life span if a partner leaves or dies. |
| Limited Partnership | A limited partnership consists of both general partners and limited partners. General partners have unlimited liability and are responsible for managing the business, while limited partners have limited liability, no involvement in day-to-day operations and are passive investors. Advantages: + limited liability; + pass-through taxation, meaning business income is only taxed once at the individual level; and + flexibility in management and decision-making. Disadvantages: + limited partners have no control over management; and + limited life span if a general partner leaves or dies. |
| Joint Venture | A joint venture is a partnership between two or more parties for a specific project or venture. Each party contributes assets or expertise to the project and shares in the profits and losses. Advantages: + combines resources and expertise of multiple parties; + flexibility in management and decision-making; and + limited life span for a specific project or purpose. Disadvantages: + unlimited liability for all parties; + potential for disagreements and conflicts among parties; and + no separate legal entity. |
Choosing the right type of partnership is essential based on the business’ needs and goals. Likewise, consulting with a legal or financial professional can help you make the right decision.
Factors to Consider When Choosing a Partner
You should consider several factors when evaluating the most suitable business partner, including:
- Compatibility of skills and work ethic: Partners should possess complementary skills that enhance the overall capability of the business. Additionally, a shared work ethic ensures alignment in approach and commitment.
- Financial contributions and responsibilities: Clear communication and agreement on financial contributions and responsibilities are crucial. This includes initial capital investment, ongoing financial commitments, and profit-sharing arrangements.
- Personal and professional goals: Partners should have aligned personal and professional goals to ensure a shared vision for the business. Differences in long-term objectives may lead to conflicts down the line.
Sources for Finding a Partner
Finding the right business partner involves strategic networking and leveraging reliable sources.
Once you have identified your ideal partner for your business, the next steps involve:
- drafting a partnership agreement;
- understanding the liability implications of your chosen partnership structure; and
- considering the tax implications of your chosen partnership structure.
Key Takeaways
Choosing the right business partner is a pivotal decision that significantly influences the success of a venture. By understanding the various partnership structures, evaluating potential partners based on key factors, and navigating legal considerations, entrepreneurs in New Zealand can set a solid foundation for a thriving business. It is crucial to note that a well-informed decision and implementing a comprehensive partnership agreement are key elements in building a successful and enduring business partnership.
If you want to learn more about the various partnerships you can implement for your business, LegalVision’s experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.
We appreciate your feedback – your submission has been successfully received.
