Knowledge from Crunch - love accounting

How to choose the right business partner

Posted by Claire Beveridge on Dec 15th, 2018 | Becoming self-employed

How to choose the right business partner | Business partners having a discussion | Crunch

Ben and Jerry. Hanna and Barbera. Batman and Robin. Keith Richards and Mick Jagger. There’s an abundance of successful business partnerships – but how did they know they’d chosen the right partners and setup? In this article, we take a look at what you can do to ensure you pick the right business partner, and how to maintain a healthy and productive relationship.

There are many similarities between choosing a business partner and a romantic partner – it’s essentially someone you’ll be spending a big chunk of your precious time alongside and will want to find that much sought-after relationship harmony with. And, as with any partnership, you run the risk of being hurt and going through a messy separation.

Choosing the right partner

When making a business partnership commitment, it’s important you really delve into the background and personality of your prospective partner. Here are a few pointers on how to get this right before you “jump into bed together”.

Trust

Trust should form the basis of any partnership. If you don’t fully trust your business partner, how will you ever relax? Do you want to be constantly checking their work or looking over your shoulder? Not trusting someone can lead to disillusionment and dishonesty. As with any relationship – personal or business – trust is key.

David Mellor is author of the “Crew to Captain” trilogy, written to help people trying to start and grow businesses. He advises:

“It’s really important that whoever you take on operates with the same or a very similar code of conduct to yourself. The acid test for me is “would I let this person go to see my best client unaccompanied, safe in the knowledge that he or she would take the relationship forward, as opposed to sending it backwards?”

Communication

Communication is commonly known as the single biggest factor in the breakdown of partnerships. Are you able to communicate openly and freely with your business partner? Will conversations be honest?

You’ll also need to figure out whether your potential business partner can communicate with others in a way that establishes and develops relationships. Sometimes technical excellence comes at a price, often in the shape of interpersonal skills!

Values

What shared values do you have? If push came to shove, what would be the one thing you’d both be unwilling to change under pressure? Think about your potential business partners morals and integrity.

“Authenticity is exceptionally important,” says David Mellor.

“Do they live up to who they purport to be and what they stand for? Is their online image coherent with the carbon-based lifeform in front of you?

“There is a direct correlation between their authenticity and the reputation of the firm.”

Complement each other

Not in an ‘oh I love your shirt today, Jon’ kind of way, but complement your business partner in terms of personality.

Often in business startups, there’ll be a person with a great idea – but they’ll need someone to complement their skill set to get the idea in motion.

An example of this is Steve Jobs and Steve Wozniak. Jobs was very much the creative visionary who lacked some of the technical wizardry that Wozniak could provide. Together, they formed an ideal partnership – one was the creative and business mind, the other supplied the technical knowledge.

Consider this when looking for a business partner – do you really need two business minds with zero creative input managing the business? Being able to complement each other’s personality will produce better business harmony.

David Mellor says that a good business partner should be capable of sourcing work, without being needy:

“The last thing you need is someone who is dependent on you to provide them with work. A genuine partner can source work for themselves, you, and anyone else in the business. They are looking out for the firm, not just themselves.”

Choosing the right partnership setup

Once you’ve committed to your business partner, it’s time to decide specifically which type of business partnership you’ll enter into.

Put simply, a business partnership is where two (or more) people share management and profits of a business. There’s many different types of business partnership – each having different levels of business liability for the partners involved.

Perhaps you’ll decide that you and your business partner want to form a limited company.

For this, you’ll need to ensure you have a shareholders’ agreement. This document is important and will ensure that should a company need to sell its shares or change its share structure, this is done on a basis which is fair to all shareholders. The shareholder agreement also stops shares being ‘diluted’ and can allow for staff share schemes.

Two-person limited company

A two-person limited company is just that: a business formed by two people, who are both the main shareholders and Directors of the business. The company must be registered and incorporated with Companies House. An advantage of this type of company is that the shareholding is easy to manage and fairly simple to change if you need to.

For example, Amy and Barry form a limited company ‘Happy Happy Design School’. They both become directors of the company and take an even share split.

The proportion of the business that Amy and Barry have ownership of doesn’t affect their salary – Amy and Barry are able to pay themselves however much they would like. There are a number of different ways that limited companies can pay its directors, depending on business requirements.

Want to set up a limited company? Get the guide.

General Business Partnership

Let’s say that Amy and Barry want to start a graphic design company. They choose to enter into a general business partnership and draw up a partnership agreement. Depending on the share profit agreement, both Amy and Barry will be equally responsible for the running of the business. Both will be eligible to receive any profit the business makes and both are liable for any business debt.

The advantage of this general partnership is that both Amy and Barry will both be classed as self-employed sole traders. For example, when drawing up their partnership agreement, they decide that Amy owns 60% of the business and Barry 40%.

The graphic design company makes a profit in their first year of business of £100,000 – Amy would take home £60,000 and Barry £40,000. Both would then have to complete a partnership return before filing their end of year Self Assessment and paying their personal tax and self-employed National Insurance to HMRC.

There are, of course, disadvantages to a general business partnership. You are both liable for any debt the business incurs. What if Amy runs up hundreds of thousands of pounds worth of debt on a company credit card? Barry would have to help foot the bill – as he is as responsible for the debt as Amy.

Limited liability partnership

A Limited Liability Partnership (LLP) is an ideal set-up for the types of professions that normally operate as a general business partnership, such as solicitors, accountancy firms and dental practices. An LLP shares the same characteristics as a normal partnership structure in terms of tax liability, internal management and the distribution of profits, but it provides reduced financial liability for each partner.

Managed much like a general business partnership, the partners in an LLP all have a say in the running of the business. The limit of each LLP members liability is agreed between the members and usually stated in a partnership agreement.

Need specialist advice?

Still confused about setting up a partnership and want to speak to someone who can help? Call us on 0333 311 8000 to book a consultation.

Build your own online accountancy package

Join 11,000 clients who trust our advice, support, and leading accountancy software for their business. Choose exactly what accountancy support you need with our new tool and get a quote in 60 seconds.

Join Crunch Chorus:
The free community for the self-employed

You'll get access to a range of benefits, such as invoice software, jargon-free business guides, great networking opportunities, discounts, plus much more

Useful tools and resources

Business guides

From understanding expenses to starting a limited company, we've a range of jargon-free business guides for you to download and keep.

Invoicing software and templates

Create, send and store sole trader invoices in a snap with our free invoice software. You can also download a selection of invoice templates for all business types.

Take-home pay calculator

Use our Take-Home Pay Calculator to work out your true earnings and see if you could save money with a different company set up.