Partnerships and Mistakes MadeStatistics show that 80% of business partnerships ultimately fail. Despite this alarming number entrepreneurs and small business owners continue to enter partnerships. Creating the right business partnership can be professionally satisfying as well as extremely lucrative. Combining skills and knowledge, having more business capital, allowing greater borrowing capacity, and having tax benefits often outweighs the cons. However, like any other relationship working with a hair business partner successfully over the duration of your business means going in prepared with the proper foundation and groundwork in place. If you believe the best way to navigate the ups and downs of your new hair business venture is with a trusty partner or two, do yourself a favor and read common mistakes to avoid before entering a hair business partnership. Here are some common mistakes to avoid before entering a hair business partnership.
Common Mistakes To Avoid
Ignoring That There's No Shared VisionShortchanging the importance of a shared vision is a significant issue for building a solid hair business partnership. Starting a new business is exciting, so exciting that many entrepreneurs overlook incompatibilities with their new partners. You and your partner must work toward the same business goals and how to achieve them. Where you see your hair business is going in the future and the path to get there are apart of the vision that will drive your business to success. Being sure you and your partner are on the same page when it comes to your plan of action to achieve your vision and how your business goals are to get accomplished. You should determine in advance:
- Your vision for your hair business Tip: Creating a Vision Statement together is ideal for this step.
- Project 5 to 10 years in the future
- Dream big and focus on the success of your hair business
- Use the present tense
- Use clear, concise language
- Infuse your statement with passion and emotion
- Align it with your business values and goals
- Have a plan to communicate your vision statement
Creating the Wrong Partnership Business StructureSharing ownership and profits with a partner constitutes a legal form of business operation. There are many partnership structures, but the three most common business structure is a general, a joint venture and limited partnerships.
General PartnershipsGeneral Partnerships form when two or more people agree to go into business together to make a profit. With a general partnership, you don’t have to put anything into writing or file anything with your state or local authorities. What distinguishes a general partnership from other partnership business structures is the joint liabilities of everyone in the partnership. Choosing a general partnership for your hair business will allow all partners to split all profits, managerial responsibilities and liabilities for debts in equal proportion amongst everyone. If you plan to share profits or losses unequally, this is in the legal partnership agreement to avoid disputes further down the line.
Joint VentureA joint venture is a form of a general partnership that remains until a specific project completed or a particular period elapses that everyone agrees upon.
Limited PartnershipsLimited Partnerships have at least one general partner and one limited partner. The limited partner has limited personal liability. This means that partners are only liable for the business debts up to a certain limit. This partner is silent, contributes money to the hair business, and has no direct say in daily operations or running the hair business in the partnership. Limited partnerships also avoid “double taxation.” These partnerships won't receive tax at the business/corporate level. Instead, they are “passed through” only to be reported on the personal tax returns.
Let's Get In Formation, Limited Partnership FormationNot correctly forming your limited partnership can be a mistake for everyone involved. Here are a few steps to form your Limited Partnership:
Picking a nameIf you and your partner choose to name your business anything other than your personal name, most states require you to register a “Doing Business as” (DBA) name. Your county/parish or city also need this. Tip: Be sure to search your names availability before filing. You can search your local Secretary of State Office database to be sure your hair business name is not the same or too similar to another business. Also be sure to check out the U.S. Patent and Trademark Office to make sure your hair business name does not violate any registered trademarks.
Draft a Limited Partnership AgreementAlthough not mandatory in most states, this step is highly recommended. Since partnership legislation varies from state to state, partnership agreements allow for standard terms of a Limited Partnership. Be sure to check with your state's requirements. Elements to include in your hair partnership agreement:
1. Partnership Information
- List the name of the partnership, location, when the partnership formed and the purpose of your hair business.
- Who your partners will be and their capital contributions
- List the partners, their addresses, and Social Security Numbers
2. Profit and loss distributionEach partner “distribution percentage” which should reflect their share of partnership profits and losses, this must be clearly stated in the agreement.
Voting, Admitting New Partners, and Management RulesAnother common mistake to avoid before entering a hair business partnership is figuring out the rules on who is allowed to do what. You and your partners should determine who is going to manage the partnership, who can sign contracts, and rather or not partners will be receiving salaries for labor and services. Unlike distributions of profits, wages do not have to be made proportionately to the partners. Unequal partners should not have equal salaries if one partner is doing more work their salary should reflect such. Also, determining the voting rights of partners are a common mistake when forming a partnership. You should take into account different scenarios you will face. Usually, a simple majority vote of the partners will suffice on what happens and what doesn’t. A unanimous vote is necessary for admitting new partners, merging with another company, selling part of the hair business, or filing bankruptcy.
Exit StrategyThe most important thing to have written out in your partnership agreement is the “exit strategy” for everyone involved in the partnership. When going into a partnership everyone assumes everything will go according to plan with communication and all partners are performing their duties, but this is a common mistake you should avoid before going into your hair business partnership. This section should entail how to dissolve the partnership, some examples include:
- Circumstances in which a partner can withdraw
- How much of notice they must provide
- How to distribute assets
- What happens if a partner retires
- If a partner goes bankrupt
- If a partner becomes disabled or dies
Who Will be Your Registered Agent?Some states require every business entity to have and continuously maintain a registered agent in their state. Your registered agent must be a resident or a business entity that is authorized to conduct business in your state. They also must have a physical street address in the state. Tip: If your hair business is in your state, you may act as your own agent.
File For a Certificate of Limited PartnershipFiling and completing a Certificate of Limited Partnership is mandatory. Depending on your state your filing, the certificate requires necessary information regarding your business. This includes entity address, agent name, and address, names, and addresses of partners in addition to other information. This certificate and the forms can be found online at your Secretary of State website.
Register for an Employer Identification NumberAlso known as a “Federal Tax Identification Number,” an EIN is required to open your business banking accounts, to hire employees, or to make business transactions. To apply for an EIN, file an IRS Form SS-4 or apply via the IRS online application.
Obtain a State ID NumberSome states require you to file a state ID number. Like your EIN, this helps identify a business for tax purposes. If it is needed, they are available via your State’s Department of Revenue.
Obtain Required Licenses and PermitsFederal, State, and local authorities require permits and or licenses for specific companies to operate legally. A useful database of federal and state business licenses and permits are at the U.S. Small Business Administration website.
Obtain InsuranceBecause each partner’s personal assets are at risk of being affected if sued for any reason. Since each partner’s personal assets exposed to the claims of the partnership's creditors, the best way to obtain protection is to carry insurance for the unexpected. You should discuss these and other types of insurance coverage with an insurance agent.
- Property and liability coverage
- Auto Insurance
- Health Coverage