Avoiding conflict in partnership businesses

They have more capital but there’s always the risk of disagreements and friction

In Summary

• Almost all business successes in the world are a result of partnerships

Illustration of partnership
Illustration of partnership

People often link up with relatives, friends and workmates to start a business. There are obvious advantages in sharing the costs of running a business, but conflicts may arise if the responsibilities of each partner are not well spelt out.

Almost all business successes in the world are a result of partnerships. Steve Jobs, the man who built the Apple brand of consumer electronics, said that great things in business are never done by one person. Success is achieved by a team of people.

Will Smith, a Hollywood actor and musician, attributes his success to partnerships. "People ask me all the time what the key to success is, and I always give the same answer: Partnership. Find people who share your vision and your dreams and partner up," he advises.

The main advantages of partnerships are that more capital is available for the business, which makes start-up costs lower for each partner. The business benefits by having diverse ideas from more than one person, as each partner brings a unique mix of experience and education. The availability of bigger capital means the business can potentially borrow more money than a sole proprietorship.

The flip side to partnerships is that there's always the risk of disagreements and friction. As each partner is an agent of the partnership, his or her actions have consequences on the entire partnership. This includes contracts signed with suppliers, the handling of clients, hiring and firing of employees and loans taken to run the business.

One of the best ways to avoid disputes is to have a partnership agreement. This is a document that sets out the rules all partners will follow while running the business. Some of the things to include in a partnership agreement include how much money each partner puts into the business and what property is included.

The agreement should state the role of each partner in day-to-day operations, and how each will be paid. For example, one of the partners may get a bigger share of profits because his or her contribution while starting the business was bigger. A partnership can have sleeping partners, who invest in the business but don't have a say in its day-to-day running.

A good agreement should have a system for resolving disputes, which may arise due to differences in opinion, sharing of roles and distribution of profits.

An agreement should state what happens when the business closes down; specifically, how property is to be allocated and debts repaid. Equally crucial is a system for handling affairs when one of the partners wants to leave the business or dies.

One critical aspect of business that's often not thought about is intellectual property. This includes trademarks, inventions and logos. A partnership agreement should spell out what happens to the business' intellectual property when the partnership is dissolved, sold or one of the partners dies or decides to leave.

It’s a good idea to get legal advice when creating or changing a partnership agreement.

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