Key Takeaways:

  • Before becoming a business partner, conduct thorough due diligence, assess financial transparency, and establish a solid legal agreement.
  • Define roles, responsibilities, and an exit strategy to prevent future conflicts.
  • Understand tax implications, ownership structures, and liability protection when entering a business partnership.
  • Consider a trial project with a potential partner to evaluate compatibility before committing long-term.
  • Ensure ongoing communication, regular financial reviews, and legal compliance to maintain a smooth partnership.
  • Explore different types of partnerships (general, limited, LLC, etc.) and their legal implications.
  • Seek legal guidance from an experienced attorney to draft partnership agreements and resolve potential disputes.

Many want to know how to become a partner in an existing business. A business partnership is when two or more parties come together to own and operate a business.

Things to Consider Before Becoming a Business Partner

As an entrepreneur, at some point, you may consider bringing on a partner to help grow your business. Most business partnerships begin with excitement, however. That excitement eventually fades away.

Here are a few important steps to take at the beginning of forming your partnership:

  1. Do Your Due Diligence: When it comes to signing contracts and getting down to business, make sure you call former partners, business associates, and former clients of the person your thinking about partnering with, as well as look into reading the comments on their social media profiles or Google search them.
  2. Lawyer-Up: When you partner with someone, every aspect of the business relationship should be put in writing -- including, business goals, duties, responsibilities, and expectations.
  3. Exit Strategy: Planning an exit strategy at the beginning of starting a business partnership is similar to planning a divorce during the wedding, but should still be planned nevertheless. A strategy such as this should include how you will divide the assets of the company, as well as how the partner's portion of the business will be handled in the case of death.
  4. Protect Yourself: Regardless of how you choose to structure your business, whether that be incorporating or forming an LLC, you need to decide how you plan to protect your savings, your home, your car, etc. from any liabilities associated with the business.
  5. Don't Lose Touch With The Brand of Your Business: Sometimes joining forces with a partner after a business has already been formed can be more difficult than if you were to have started the business together from scratch. In other words, merging entities don't necessarily mean merging identities. In short, don't lose sight of who you are and what your company stands for.

Types of Business Partnerships and Their Legal Implications

Before entering into a business partnership, it’s important to understand the different structures available and their legal implications. The main types of partnerships include:

  1. General Partnership (GP):
    • All partners share equal responsibility for business debts and obligations.
    • No formal agreement is required, but a written contract is recommended.
  2. Limited Partnership (LP):
    • Includes both general partners (who manage the business and assume liability) and limited partners (who invest but have limited liability).
    • Requires formal registration with the state.
  3. Limited Liability Partnership (LLP):
    • Partners enjoy limited liability, protecting their personal assets from business debts.
    • Common in professional industries, such as law and accounting firms.
  4. Limited Liability Company (LLC) Partnership:
    • Provides flexibility and liability protection for all partners.
    • Business profits and losses can be passed through to personal tax returns.

Each type of partnership has different legal and tax implications. Consulting with an attorney can help determine which structure aligns with your business goals.

What to Know Before Partnering With an Existing Company

Here are a few questions you should ask yourself before becoming a partner in an existing company:

  • Does the company have any pending or outstanding lawsuits, or is there any possibility for such cases to occur in the near future?
  • Is there is any evidence of unfairness or favoritism among partners in the Operating Agreements or By-Laws?
  • Is there transparency when it comes to the integrity of the company's overall financial health?
  • Is there an appropriate system of internal oversight in place to prevent partners from committing fraud?
  • Is the value of the company protected against disinterested or uninvolved partners?
  • If you're contributing capital, is that money protected?
  • What are the tax ramifications for your personal stake in the company?

Legal and Financial Due Diligence Checklist

Before joining an existing business as a partner, conduct thorough due diligence to assess financial and legal risks. Here’s a checklist to guide your evaluation:

Financial Considerations:

  • Review the company’s financial statements (profit and loss, balance sheet, cash flow).
  • Analyze outstanding debts, loans, and liabilities.
  • Assess the company’s revenue streams and customer contracts.
  • Check for any pending or historical tax issues.

Legal Considerations:

  • Examine the existing partnership agreement (or operating agreement for an LLC).
  • Confirm intellectual property ownership and patents.
  • Identify any pending lawsuits or regulatory compliance issues.
  • Understand buyout clauses and partner exit terms.

Conducting due diligence minimizes risks and ensures you make an informed decision before becoming a business partner.

How to Ensure a Partnership Runs Smoothly

The following are some tips to help ensure your business partnership can run as smoothly as possible:

  • Consider Working on a Small Project Together First: Just as hastily getting married without dating someone first can end up with serious repercussions, so too can entering a business partnership with someone you hardly know. By first partnering on a small project together it can help you to learn about the good and bad sides of your potential partner, and thus be able to determine from that interaction whether or not the long-term partnership is worth pursuing or not.
  • Don't Partner With Someone You Can't Fully Trust: Trust is the glue that holds every relationship together, especially a business partnership. If you are not able to trust your potential partner completely, then the partnership will never work. Before ever entering a business partnership with someone, make sure you are doing so based on a solid foundation of trust.
  • Enter a Business Partnership From a Position of Strength: You should never enter a partnership until you and your potential partner have reached a level of independence. If not, your relationship will be built on co-dependency, and thus operate from a state of dysfunction. With that said, a dysfunctional company is one that will always struggle to properly serve their customers effectively.
  • Enlist Partners That Multiply The Business, Not Just Add to It: Bringing on a partner is not to be confused with hiring an employee -- employees add to the business, but a partner multiplies it. You want a partner who complements you and is able to provide skills and/or connections that you do not necessarily possess. The key is to find someone who you are able to work in harmony with, that way you'll be able to make beautiful music together.

Establishing a Strong Partnership Agreement

A well-drafted partnership agreement is essential to prevent conflicts and protect all parties. This agreement should clearly define:

  • Ownership Percentages & Contributions: Specify each partner’s equity share and capital investment.
  • Decision-Making Process: Outline how business decisions are made (e.g., unanimous vote, majority rule).
  • Roles & Responsibilities: Define each partner’s duties and expectations.
  • Profit & Loss Allocation: Detail how profits, losses, and distributions will be handled.
  • Dispute Resolution: Establish procedures for resolving conflicts, including mediation or arbitration.
  • Exit Strategy: Define how a partner can leave the business and what happens to their share.

Having an attorney draft or review your partnership agreement ensures that it is legally sound and aligned with business goals.

Frequently Asked Questions (FAQs)

1. What are the key steps to becoming a partner in a business? The key steps include conducting due diligence, negotiating ownership terms, drafting a partnership agreement, and legally formalizing the partnership through the appropriate entity structure.

2. How do I protect myself when joining a partnership? You can protect yourself by conducting financial and legal due diligence, defining roles and expectations in a formal partnership agreement, and ensuring liability protection through business structuring.

3. What are the tax implications of joining a business as a partner? Tax implications vary by partnership type. General partners report business income on personal tax returns, while LLCs and LLPs offer pass-through taxation with potential liability protection.

4. How do I leave a business partnership? Exiting a partnership should be outlined in the partnership agreement. It typically involves selling your share, negotiating buyout terms, or following a dissolution process.

5. Do I need an attorney to become a partner in a business? Yes, an attorney can help draft and review agreements, ensure compliance with business laws, and protect your interests throughout the process.

If you need help with becoming a business partner, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.