New business ventures are launched with an impressive frequency. According to recent data, “On average, there are 5.1 million businesses started every year.” These businesses range from someone launching a sole proprietorship to sell crafts online to large-scale, multi-state ventures that plan to grow and expand rapidly. When it comes to small businesses, the success rate can be somewhat intimidating. Recently reported data shows that “the first year survival rate of businesses ranges from 74.9 percent to 87.5 percent, depending on the industry.” However, by the tenth year, approximately 65.3 percent of businesses close their doors. Companies in the construction and wholesale trade industries are particularly susceptible to challenging success rates.
Before you let these statistics deter you from making your business dream a reality, it’s important to understand some of the strategies for maximizing your chances of success while minimizing potential risks. Many entrepreneurs have a vision of starting a new business with a close friend, colleague, or family member so that they can rely on each other to launch, operate, and grow the business together. While forming a business partnership in Colorado works well for many, this business structure is not without its challenges and risks. Taking some time to identify some of the most common business partnership mistakes is important so that you can set yourselves up for a stable and successful future. Let’s take a look at how business partnerships work, some key business partnership tips for those hoping to move forward with this endeavor, and the benefits of working with a highly qualified and friendly Colorado business attorney during this process.
What is a Business Partnership?
There are a few ways that entrepreneurs can structure their new business, from sole proprietorships to limited liability companies (LLCs) to corporations. Each option has its own tax considerations and operational nuances, so it’s helpful to familiarize yourself with the potential benefits and drawbacks of each business entity before you select the option that best suits your business needs and goals. Business partnerships are attractive to those hoping to launch a new venture together, as this type of business structure creates a legal relationship where two or more individuals or entities can co-own and operate a business for profit. The partners share the various business-related responsibilities, profits, and financial liabilities. Those interested in forming a partnership can select from one of three options, which are identified and briefly discussed below.
General Partnerships
A general partnership allows the partners to share the management, profits, and debts of the business equally. While this option is simple to set up (it begins the moment that the partners begin to run the business, without the need for a formal written agreement or official registration), a general partnership does not offer any liability protection to the partners. In other words, the individuals can be held personally liable for the business’s debts and other legal issues.
Limited Partnerships
For those looking for a bit more structure may consider forming a limited partnership. In a limited partnership, one partner operates the business and assumes full responsibility and liability, while the other partner(s) serve as silent inventors. The passive investors are able to minimize their personal liability, as it is limited to the financial contributions they make to the business. Since their personal liability is significantly reduced, they also have less of a voice in matters regarding the operation of the business.
Limited Liability Partnerships
With a limited liability partnership (LLP), the partners all manage the daily operations of the business, but they enjoy greater protections from certain risks and liabilities. Limited liability partnerships give some personal liability protection to the partners, which can give them greater peace of mind in the event of a dispute or legal issue.
Helpful Tips When Starting a Business Partnership in Colorado
When you start a business partnership, it’s easy to assume that you and your partner will always see eye-to-eye about the decisions you will make. Should any disagreements arise, you may assume that you will simply work it out with minimal drama. However, launching a successful business partnership requires you and your partners to plan for things like resolving disputes, what happens when a partner wants to leave the business, and succession planning. Creating a clear partnership agreement will serve as the cornerstone of your business, providing you with the guidance you need to enjoy a secure foundation. Here are just a few of the questions that you should ask yourselves to help you avoid some common business partnership mistakes.
Do We Share a Vision For the Business?
Take some time to discuss your vision for your business with your potential partners. Making sure that you share similar goals for year one, year five, and year ten of your business is important, as every decision that the partners will make will support these goals.
What Are We Willing to Contribute to the Business?
Clearly defining the financial contributions, time, and effort that each partner is willing to invest in the business is critical. Some of the most common business disputes arise from partners who are bitter about the lackluster participation of the other partner. Be sure to use the partnership agreement to document the distinct roles and responsibilities of each partner.
How Will We Handle Conflict?
It’s hard to picture a time when you and your business partner will disagree. However, thoroughly planning for future conflict now will reduce stress and minimize costly legal battles later on. Include detailed plans for conflict resolution in the event of a dispute when you draft your partnership agreement. Enlisting the guidance of a dedicated and friendly Colorado startup lawyer is the best way to set yourselves up for a bright future.
Get Started With a Skilled and Trusted Colorado Business Attorney Today
Navigating the ins and outs of launching a new business venture can be daunting and overwhelming. With so much on the line, it’s worth enlisting the guidance of a highly experienced and knowledgeable Colorado business formation attorney to ensure that your new business is set up for success and sufficiently protected from potential risks and liabilities. To learn more about launching a new business, reach out to Judex Law LLC today by calling (303) 523-4022 to get started.