Partnerships

A marriage contract is the most common "major contract" an individual will sign in their lifetime. A marriage, among other things, is a legal document binding two people together in the eyes of the prevailing laws. Their individual financial holdings become the property of both people. Unlike a financial contract many marriage contracts are not detailed in the disbursement of assets if the marriage fails. Nevertheless, slightly more than 50% of marriages fail today in Canada. The result in many cases is financial burden for both partners.

This article is not about marriage in Canada. It is simply a discussion on general partnerships. The paragraph above illustrates that the most well (and sometimes the most ill) conceived partnerships fail - in spite of the fact that some oaths include; “till death do you part”. It is rare to find a business contract that makes reference to a person's life as a consideration. Not yet anyway. Having faith in a partnership is critical, but planning and developing a contract is like buying insurance. You hope that you’ll never have to use it but you're glad to have it when the turnip hits the fan. For the purpose of this article, we will assume that the Principals in the deal have a viable business AND a viable business plan.

A general partnership is formed by two or more individuals who carry on a business for profit. There are three basic steps to the formation of a partnership:

1. A registration of the partnership where required under provincial law;
2. The creation of a partnership agreement;
3. The transfer of capital from the individuals to the partnership.

Before I mention some pros and cons of business partnerships, let me relay some of my findings from 13 years of financing small businesses. It has been my experience that a general partnership of any size will fail without a written agreement and one partner that has the final say. These are the cornerstones for staying out of trouble. Let me be clear that 50/50 partnerships or other forms of equal partnerships almost never make it. In business, some decisions require quick decisive actions. These are the times when the greatest risk/reward ratios will be presented and assumed or passed. A 50/50 partnership may require debate and consensus before a conclusion can be drawn. Right or wrong a 51% ownership places all the tough calls in the hands of one person that can make that call quickly if required.

The written agreement is of utmost importance because it will spell out who does what in the partnership and what amount of stake each partner has in the deal. Finally, it should have a "shotgun clause". This clause will allow either partner the ability to get out if required or force the other partner out by buying their percentage of the partnership. Consult with a lawyer and an accountant when developing your general partnership agreement.

The challenge for most people on the 49% and 51% partnerships will be the ability for one person to be the decision-maker and the other person to take orders if required. This will take a pure business relationship and one that many people will not enjoy to begin with because they probably got into the partnership with a good friend or a family member.

The main reasons people seek partners are to offset a deficit in capital, knowledge, experience, risk or confidence. Many individuals see a partnership as a means to lower risk. However, a partnership provides little risk mitigation because the partners can be held personally liable for all debts or invoices associated with the partnership. Let's be clear, this means the individual partners in a general partnership are jointly and severally liable for the debts of the general partnership. Ignorance of the laws will not call the creditors off when they come to collect.

I am fully aware that many readers will say that they are in a partnership that has worked for several years and a written agreement is not necessary. I wish them well and hope that they never end up in court paying lawyers fees to hammer out an agreement that costs thousands of dollars after the fact but could have cost hundreds of dollars with a little planning.

The most important advice is to see a lawyer and an accountant before going into business with a partner. A general partnership may be your most comfortable way of getting into business but do it with a little planning and less faith.