Forming a new business partnership is not as simple as joining forces with a friend or family member. It’s a drastic move that requires some preparation, regardless of the business type. In a recent article published in SCORE, Deborah Sweeney, chief executive officer of MyCorporation, suggests four ways entrepreneurs can properly get ready to add a partner to an existing business.
1. Put it in writing
A partnership agreement is not required from a legal standpoint, but it’s a smart idea to draft one. Although you may trust your business partner and expect you’re both on the same page, that’s not always the case. This agreement “lays out the partnership’s terms and conditions for each owner of the business.” She suggests covering some key terms such as operational roles and responsibilities, partnership terms, admitting new partners and partner exits.
2. File for an employer identification number
An EIN is a federal tax ID that allows the IRS to identify your employer tax account. This will allow a business to bring on a partner as a sole proprietor. There are now two owners of the business instead of one, meaning you are able to receive liability protection to separate personal and professional assets.
3. Amend original agreements
For a business that operates as a limited liability company, it’s important that the operating agreement evolves with the company’s structure. An operating agreement lays out how the company is run by its members, their ownership percentage and rights and responsibilities, but those things change when a new partner joins. “An LLC operating agreement must be amended to reflect changes for the incoming partner,” Sweeney said.
4. Reflect on what’s best
Take time to consider if the partnership is good for the business. Sweeney argues that partners do not have to be extremely similar but rather able to balance each other’s strengths and weaknesses. Discuss your plan to add a partner with an outside source such as a mentor or legal professional.