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Partnerships can provide a means by which partners can pool their best skills and resources to create a sound business. Mistakes can be made, however, in both general and limited partnerships, and these mistakes can impair the progress and potential growth of the business. Here are 10 of the most common mistakes:
1. Not having a signed partnership agreement. All types of partnership should have every detail spelled out and signed by all parties. Far too many friends, and even family members, have made the mistake of not putting everything in writing and ending up with strained relationships.
2. Not having an attorney assist with drawing up the agreement. There are many details in a partnership agreement, and a qualified attorney will know what must be included. Make sure to find an attorney with whom you feel both comfortable and confident.
3. Not including a way out. In partnership agreements, you need to define an exit strategy that allows either party to walk away or buy each other out, without destroying the business.
4. Not using your individual strengths. Partners frequently don't make the time and effort to determine their strengths and weaknesses at the outset. One of the advantages of a partnership is using the skills and strengths of each individual partner.
5. Not forming a limited partnership. While some businesses function successfully as general partnerships, the advantage of a limited partnership is that the limited partner is not liable for the actions of the general partner. This is advantageous if you're backing a business financially, or can't put in the same time and hands-on commitment.
6. Not considering the liability issues. General partnerships have the problem of taking on liability for the debts and obligations of the business. Consider setting up the business as an LLC, an S Corporation, or a limited partnership where the general partner itself is an LLC or corporation.
7. Rushing in. Too many partnerships are put together in the enthusiasm of the moment, without a thoughtful business plan. Each partner's time commitment should be clearly understood at the beginning. You must stop and review the positives and negatives before rushing into such a commitment.
8. Not adhering to state requirements and regulations. Partnerships can require substantial paperwork, as dictated by state law. Make sure to be diligent, and complete and review all forms as necessary.
9. Choosing the wrong partner. Often, individuals find that they have partnered with someone who has a different set of goals or a very different manner of conducting business. Make sure you consider your potential partner's manner of doing business, his or her personality, and the business goals prior to starting a partnership.
10. Not adequately capitalizing the partnership. The lack of adequate capital for the projected business operation is a major mistake made by many partnerships. Prepare projected cash flow and income statements to determine how much capital you'll need to start with.
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