Written By: Barry Hartman, Co-Founder and CEO at 505-Junk, firstname.lastname@example.org
One of the earliest decisions that entrepreneurs must make is to partner or not to partner. If you decide to start a business with a partner(s), the first decision you will make is whether to establish a partnership or incorporate the business. Incorporating the business will be a larger investment initially, however your partner and yourself will be protected legally and give you the benefit of a lower tax bracket on the profits of the business. Should you decide to incorporate, you should consult with both an accountant and a lawyer that will help you incorporate the company and create a shareholder agreement.
If you are considering to partner with one or more individuals, it is important to discuss the following prior to launching the business:
1) Are the shares allocated evenly or is there going to be a majority shareholder?
A majority shareholder will generally have the final vote in major decision making, giving them a ‘controlling share’. If you have a partner/shareholder that will not be as ‘hands on’ in the business but will be providing funding, it is important to do a valuation of the business that is fair for both parties. If a partner’s sole responsibility is providing capital and being involved in strategic planning, they will expect a dividend draw but may not be entitled to being paid a salary. If a partner/shareholder will be hands on, you will need to determine a salary for that person. If a salary is not feasible due to early stage cash flow, sweat equity is the most common option. The salary should be recorded but the cash should not be drawn until the profits of the company generate enough cash.
2) What are the responsibilities of each partner?
More on this can be found in the book, The E-Myth by Michael Gerber. For a quick breakdown, you will need to allocate responsibilities between partners and employees for sales, marketing, operations, finances (accounting and bookkeeping), and human resources. You want to find an even balance in skillsets and responsibilities to complement each other, rather than clash. Having two partners that are visionaries may create conflict with the vision of the company as well as have a lacking skillset to “get it done” in the daily operations. On the contrary, having two partners that are focused on “getting it done” will lose site of the direction of the company and have no strategic path.
3) Are your personalities going to clash or complement?
The reason why our partnership at 505-Junk works so well is because Scott and I have very different personalities. Scott’s personality profile is a “Team Player/People Pleaser/Nurturer” where my profile is a “Charismatic Leader/Enforcer”. This allows me to focus on vision, leadership, and inspiration while Scott is focused on execution and building the team. We would not have been able to grow 505-Junk by 267% in 18 months without one or the other.
Note: There are many types of personality tests that you can do online. My personal favourite is 16 Personalities. It takes about 12 minutes.
Prior to making your decision, do your due diligence on each other and assess whether you will clash or complement each other. People say that “friends don’t make good business partners”. What they’re trying to say is that friends tend to attract similar personality types, hence why they became friends. Be aware of that when looking at the proximity of your network. Scott and I grew up in a very small town of 20,000 people and graduated one year apart from the same high school, but never knew each other due to our variance in personalities. We met in college and the rest is history. Everyone is bound to clash at some point, but when your values are aligned and you are both on a mission to reach the same vision, a partnership can fuel that growth exponentially.