A woman wearing a black blazer and large hoop earrings and a white-bearded man wearing a black long-sleeved shirt shake hands across a table.
You'll likely be working with your business partner for a long time, so make sure you choose someone whose skills, expertise, and work style are compatible with yours. — Getty Images/Jose Luis Pelaez Inc

Shouldering the sole responsibility of running a company is a daunting task. A business partner can relieve some of the day-to-day burdens and help guarantee the health and growth of your business. However, failing to follow proper procedures can result in chaos. Follow these guidelines to create a lasting partnership and avoid complications down the road.

Choose the right partner

Relinquishing complete control is a hard thing to do, especially when it comes to your business. Once you give up equity in your company, it’s hard to get it back, so choosing the right business partner is crucial.

Like all relationships, the ability to compromise is vital, but sharing the same fundamental values with your business partner will lessen the strain of those compromises. It takes time to cultivate a partnership and fall into a fine-tuned dance but picking someone based on optimal compatibility can get you in rhythm sooner.

When choosing a business partner, consider the following:

  • Trustworthiness: Do you have confidence in this person?
  • Attributes: What expertise and traits do they bring to the table?
  • Financial viability: Are they fiscally sound and able to contribute?
  • Strengths and weaknesses: Can their skills counter your shortcomings?

Prepare a detailed partnership agreement

Entering into a partnership is a complex process. A comprehensive contract between you and your partner provides a solid foundation for a successful collaboration. Even if you partner with a friend, executing a formal agreement offers both parties legal protection, dissolves ongoing disputes, and helps guide you when making crucial business decisions.

A good partnership outlines each person's contributions, expectations, and duties, dictates financial allocations, and instructs how you make decisions. The contract will settle minor disagreements that can turn volatile and end the partnership.

According to attorneys Fox and Moghul, "It's always better to come to terms with difficult issues before they happen than to strain to resolve them in the future." So, the more detailed the agreement is, the better. When conflict arises, anticipating problems and addressing solutions within the contract will be less stressful.

Before you partner up, you may need to acquire licenses and permits.

Select a partnership structure

The business structure you choose for your partnership will determine the amount of liability each party takes on and the tax benefits you'll receive. The benefits and disadvantages vary among entities, so check with an advisor to explore your options.

Consider the following structures:

  • General partnerships divide profits, liability, and management duties equally. They are easy to start, low-cost, and flexible, but you take on liability risk personal assets.
  • Limited partnerships allow one partner to have all the control and carry all liability and the other partner to have limited (if any) liability and control.
  • A limited liability partnership, or LLP, protects partners' personal assets and limits individual responsibility for the business's debts or other partners' actions.

[Read more: How to Choose a Legal Entity for Your Startup]

Comply with regulatory and tax requirements

As a member of a partnership, it’s your responsibility to comply with government regulations and manage business taxes. Laws and taxes may vary depending on the location and type of business conducted and how you structure your partnership.

Before you partner up, you may need to acquire licenses and permits. Most business partnerships must register with federal, state, and local agencies and obtain a tax and employer ID number. In addition, you may need other types of licenses and permits, including a business license, DBA license, sales tax permit, or industry-specific license. Check with your state and locality to confirm permit and licensing requirements.

Partnerships don't pay federal income tax. Instead, the company reports its gains and losses using informational IRS Form 1065, then files and distributes Schedule K-1 to each partner. You will report any income, losses, deductions, and credits on your personal tax return using Schedule K-1.

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