A partnership can be a great way to start a business. Working with someone you know and trust on something you both have a vision for can be incredibly rewarding. Especially when those profits start coming in.
What about when the business doesn’t take off and there are debts? Or what happens when you and your business partner disagree and can’t find a resolution?
A partnership can resolve some of the guesswork before a conflict takes place. But if you never intended to form a partnership, are there still the same liabilities and obligations?
How a good thing became a legal thing
You may or may not have had plans to work together for the long run, but then the needs of the business started changing and so did your relationship. What may have started as “helping out” might have turned into something bigger.
As long as there’s no conflict either with each other or from an IRS standpoint, everything is fine. But as soon as there’s conflict, whether it be over profits, losses or how much to pay in taxes, there is a need to define the relationship.
The default is an equal partnership
In an equal partnership, everything is 50/50. Profits and losses. This is fine if both of you just happened to contribute equally to the business, but that is rarely the case. Often, whether by perception or necessity, one person is doing more of the work of the business than the other.
Joint ventures can turn into partnerships too
It’s a very fine line between a joint venture and a partnership. And it’s easy to cross from a joint venture into a partnership that neither party intended.
A joint venture can be a great opportunity to join two businesses for a short-term project to benefit both parties. A joint venture also allows both parties to cut costs while still being able to accomplish a mutually beneficial goal.
The difficulty can come in if there are changes in the project or if some of the project continues longer than one or both parties intended. When establishing a joint venture, be sure to keep the agreement updated as the project changes.
Consequences of accidental partnerships
Of course, there’s the potential unfair distribution of profits, but there is more at stake when you form a partnership.
There are also potential debts of the business, and without anything else in place, both people will be liable. If the business doesn’t go as expected, you could find yourself on the hook for more money than you were expecting to invest.
Preventing the partnership predicament
The best way to avoid an accidental partnership is to form one on purpose. Keep in mind that you can always renegotiate the details of a partnership. Including dissolving the partnership.
There are several types of business partnerships that can keep your potential risk in a comfortable range. Keep the conversation with your partner open and honest so that you can both avoid surprises and potential litigation.