☰ Menu
× Close

Business Partnership Mistakes To Avoid

Business Partnership Mistakes To Avoid

Preparing to go into business with someone is an inspiring time, but it’s unfortunately also common for major mistakes to be made due to all the initial excitement. 

So how do you get your business off the ground and maintain a healthy business partnership? 

You can start by avoiding the most common business partnership mistakes.

What Are Business Partnership Mistakes Every Entrepreneur Should Avoid?

You’ll notice a recurring theme throughout these common mistakes is the importance of an attorney. The best way to protect yourself and your investment – whether that be financial, expertise, or sweat equity – is to have a clear, legally binding, written agreement from the very beginning.

1. Avoiding Hard Conversations With Your Potential Business Partner

Before creating a business partnership, you must have a very frank conversation with your potential business partner. This is especially important if the business partner is a long time friend, or even your spouse. 

Aside from sharing your great ideas that are sure to result in a successful business venture, you need to get very candid about the details. For instance, there must be full transparency about what everyone is capable of doing and what they are wanting to do. While one person may have experience in one area, don’t assume they want that responsibility.

Furthermore, this conversation is not a one-and-done type of deal. For the life of your business, the partners will need to revisit expectations regularly. 

Are you a future or current small business owner? Find out how Carson Law can help you protect yourself and your business by getting in touch with us today.

2. Forgoing A Written Agreement

For the sake of your business and your personal wellbeing, put everything in writing. Moreover, the ins and outs of your business partnership needs to be in writing.

This is much more than just stating, “I agree to do business with you.” Instead, the nitty-gritty details need to be documented. Make sure that all tasks are listed and that each one belongs to someone. 

Many times, new business partners will just assume someone will eventually get around to x,y, and z. The problem with that mentality is that it’s not sustainable. And if you follow this method, you’ll be waiting for when not if a problem arises.

The best bet for all involved is to have a written partnership agreement. Moreover, you’ll each want your own personal attorneys to review the document.

3. Assuming You Don’t Need A Business Entity

This is perhaps one of the most common mistakes. Possibly because people new to business ownership and partnership are simply unaware of all they need to know and do.

With that being said, you need a business entity outside of the partnership agreement. 

Depending on the type of business you’re going into and the long-term goals, you’ll need to choose the best entity for your business. 

For fellow Texans, it’s good to know that there is a reason for LLCs being the most popular. This is due to LLCs being the most flexible business operating structures. 

However, certain types of professionals may need to meet certain standards which may dictate the entity you choose.

Furthermore, your long-term goals and plans should also hold weight in this decision. For instance, if you plan to eventually take the company public, then you may be leaning towards a corporation.

And if you plan to grow your business for about 5 years and then sell, then an LLC or limited liability partnership may be your best bet. 

All in all, you need to have a very in-depth conversation regarding individual and partnership goals.

4. Lawyer Up Together Or Not At All

Any lawyer will tell you that each member of a partnership should hire their own attorney. 

However, the increased costs of each partner having their own attorney shouldn’t be ignored. If there are cost restraints, then the partnership needs to have at least one attorney looking over everything.

It’s important to note that sharing one attorney is not the best idea. Furthermore, you will likely have to sign a waiver of conflict in this situation.

Moreover, the reality of a business partnership is that what’s best for one partner isn’t necessarily best for everyone. This also applies to the business itself. 

What you need is your own attorney. This would be someone who is in your corner, and your corner alone. They will be looking out for your best interest above all else – every step of the way.

Need an attorney in your corner? Carson Law is ready to have your back throughout the entire process of starting and owning your small business. Reach out today to get the legal representation you need on your side.

5. DIY Bookkeeping By Non-Bookkeepers

Like with most types of relationships, finances can be a quick cause of dispute between business partners.

To avoid mishandling of funds or any other unnecessary drama, it is best to employ the services of a professional bookkeeper. Having a third party (who does this for a living) look through your business’ finances ensures fair play. Paramount Bookkeeping is an ideal solution for Houston businesses.

Again, not everyone can afford a bookkeeper, especially when their business is young. At the very least, track your finances through a program like QuickBooks.

6. Not Tracking Your Business Capital

Even if your business partner is your best friend, sibling, spouse, or parent – always, always have a clear understanding of who owns what percentage of the business.

While common in practice, there is no hard and fast rule that since your partner contributed 70% of the funding that they own 70% of the business. Once again, a very frank and transparent conversation needs to take place.

Besides the initial funding to get the business off the ground, there are several other aspects to take into consideration. First of all, who is the subject matter expert? You may not have the funding, but can your business partner make the business work without you?

Furthermore, sweat equity counts! And don’t forget about who has decision-making control. Plus, you can be a majority owner of the business and not be the one making day-to-day decisions.

All of these details lead back to the importance of a steadfast operating agreement. Expectations, capabilities, wants, goals, must-haves, must-nots – the list goes on. The best way to ensure that these details don’t diminish anyone’s hard work, or your relationship in and out of the business, is to have an attorney from the very beginning. 

7. Agreeing To A Business Plan You Don’t Fully Understand

As an attorney who works with small businesses, I’m often asked, “What is the best way to know I’m making the right decisions for myself and my business?”

First of all, there is always a level of discomfort in opening and running a business. Being a business owner is probably one of the scariest things you can do.

However, you must understand what you are getting yourself into. When you really and truly comprehend the decision-making process, lines of responsibility, and business plan – you should feel good.

But, if you’re unsure of the details, it’s time to pump the brakes. Go back to your attorney and ask them to explain everything again. Ask them to explain it a third, fourth, or fifth time if that’s what you need. Also, sit down with your business partner and have an in-depth discussion about what you are both trying to accomplish.

At the end of the day, if you don’t understand everything or are not comfortable with it, then it’s not the best decision for you. 

Start Your Business On The Right Foot & Avoid These Business Partnership Mistakes With Carson Law

Before opening a business, you need to know how to trust your intuition. If things look weird and smell weird, chances are – something is off.

However, if everything is passing your sniff and gut test, then that is your intuitions’ green light.

But of course, don’t go on that “good feeling” alone. Get a partnership agreement. Even if you choose to forgo creating a separate legal entity (which we do NOT recommend), the partnership agreement is an absolute must. Plus, it makes the process easier, will cut down on the chances of litigation down the road, and will help pass the gut check.

Ready to start your business with your best foot forward while protecting your future? Contact Carson Law today to get started.