Last Updated: February 16, 2024, 1:55 pm by TRUiC Team

Effective Business Partnership Agreements

Ch 2. 01

A solid partnership agreement is fundamental in establishing a successful business. It addresses critical issues like ownership percentages, role responsibilities, and scenarios when partners decide to part ways. This video provides insights into what to consider and how to navigate potentially complex discussions about dividing business ownership, from considering initial investments to valuing skills, relationships, and work contributions.

This video is part of the free Small Business Startup Course designed to help walk you through the entire process of business formation from idea to launch. 

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Division of Business Ownership: Beyond the Basics

The division of business ownership extends beyond simply calculating initial investments. It involves understanding the dynamics of working in and on the business. From building products to identifying new market areas, the roles differ but are crucial for business growth. This section delves deeper into how business ownership can be divided, considering individual contributions, negotiations, and leveraging points for a fair distribution.

Effective Business Partnership Agreements – Transcript

When establishing a legitimate partnership agreement for your business, you can't simply just shake hands with your partners and get started. You need to discuss and agree on important details and issues. What percentage of the business will each partner own? Who will take on certain responsibilities for the business? And what will happen if one or more partners decides to terminate their relationship with the company?

In this video, we'll go over everything that you should consider and how to go about navigating what can be challenging discussions surrounding how to divide the ownership of a business you're starting.

Hey everybody, Will Scheren here from Small Business Startup Guide by TRUiC. This video is part of a larger course dedicated to helping small business owners cut through the noise and get to the essentials of starting and operating their business. If that sounds like it'd be really useful to you, be sure to like and subscribe.

When considering the division of ownership of a business, it's important to note that a salary is gained while working in the business, while ownership is gained while working on the business.

Working in the business means doing the tactical things that keeps the company moving — Building the products, cutting the hair, doing the accounting. Working on the business means doing the strategic things that will move the company to the next level. Identifying new target market areas or sources of revenue, innovating the product line, and finding other areas of expansion. That's why the owners should be the individuals spending most of their time working on the business as they will gain the benefits of the growth of the business.

And that ownership can be divided. If you're starting a business by yourself, the division of ownership is pretty straightforward. You'll own 100% of that business and be 100% responsible for that business all while receiving 100% of the benefits generated by that business. But if you're starting a business with partners, then the ownership of the business will need to be divided amongst the partners. And while founding partners often divide the ownership of a business equally, this isn't always the case.

Conversations with people about how to divide the ownership of the business that you're starting could cause some anxiety or tension. But ultimately, it's just a negotiation. And just like any negotiation, it's best when the potential partners come to the table ready to fight for their interests, knowing what they want and need to walk away from the negotiation with, and ready to creatively think of ways to incentivize the other members to agree to their terms.

Points of leverage in negotiating how a business will be divided amongst owners include: the portion contributed by each partner of the needed initial investment to start the business, any valuable skills or business relationships that partners may be bringing to the table, and lastly, how much work each of the owners plans to put into the business that will be compensated with ownership rather than a salary.

Generally, the amount of money that each of the owners will contribute to the initial owner's investment, which we discussed earlier in the course, is the starting point for ownership negotiation.

As these values are quantitative and do not require the partners to value the contribution while assuming the risk of assessing the future value of the company. In regards to assessing the value of the skills and desire to work on the business that each of the potential partners brings to the table, and how they'll affect the distribution of ownership in regards to each owner's initial investment, it's best to assign a dollar amount valuation to each of the skills, relationships or work that the partners are leveraging, and to keep in mind that by paying for these skills, relationships, or work with shares of the company, you'll be removing some of the cash burden placed on the company in the future.

However, if the company is successful, the cost of paying for these factors with shares could be more costly to members than if they had not given away ownership of the company during the startup phase.

As you're discussing ownership rights amongst partners, it's natural for the conversation to steer towards other benefits and responsibilities of ownership as you consider the voting rights, daily duties, performance requirements and hourly or salaried pay of each member. As all of these factors can be used to leverage for a higher or lower ownership percentage as well.

So, in summary, to figure out how much ownership of the company each owner should receive, start by figuring out how much money each of the potential partners will contribute to the initial owners' investment and then conduct negotiations while leveraging the skills, relationships, and work contributions that each owner will bring to the company.

You will definitely need to have questions surrounding percentage of ownership answered before creating the documents that you'll need to turn your business idea into a legal business entity.

But these legal documents will have some tax and legal implications for you and your business — and business law and accounting are two skills that require enough expertise that you're going to want some help with them. So in the next video in the course, we're going to talk about selecting a lawyer and accountant for your business.

This video is part of a step-by-step course that gives business owners all of the essential information for starting and operating their business. We provided a link for you to download all of the free and discounted business tools we mentioned in this course below this video.

Be sure to like and subscribe to get more of this content. We'll see you in the next video, and if you have any questions, let us know.