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Partnering Through Business: Is it Right for you?

Entrepreneurs in Canada’s retail cannabis sector face several challenges. The market is still in its infancy and has been a rollercoaster of ups and downs and changing regulations. Owners who want to open stores in multiple provinces also have to adapt to different provincial legislation.

Sometimes bringing in a partner seems like the best course of action. But how do you navigate the new business structure? Do you only want an investor or a full-time partner to share the highs and lows? What happens if the partnership doesn’t work out? Questioning the pros and cons of having a partner is a great place to start.

Are you Partner Material?

Some people are just better suited to working alone. As a sole proprietor, you have complete control of your business and never need to answer to anyone else. You can take full credit for your successes and should the business fail, you will be required to absorb any resulting debts or liabilities personally.

For others, it can be reassuring to have someone standing beside them as they make business decisions. What a partnership takes away in autonomy, it delivers in additional support, a diversified skill set, and more capital.

Before rushing into business with someone, it is essential to determine if you are compatible.

Ask yourself if you have the personality to work in harmony with a partner? Do they have the right personality? What will they bring to the table? What will having a partner cost you? Once you have decided to take on a partner, it is time to determine how that arrangement will be structured and seek legal counsel to draft a partnership agreement before you open your doors.

What Kind of Partnership is for you?

In Canada, business partnerships can be created between two or more legal entities (individuals, corporations, trusts) who share risk in a business. The level of each party’s liability and share of the company depends on the partnership agreement that has been formed.

In a general partnership, two or more parties share equally in both the profits and liability of the business. Both owners typically oversee the day-to-day operations of the company and are personally liable for any debt, legal, or financial obligations for which the business is responsible. Ownership and profit share are typically split evenly, but can be divided based upon each party’s investment or other factors such as the time each partner has invested. Owners generally receive salaries, and it may take years for them to see any additional returns on their investment.

A limited partnership agreement exists between one or more general partners (with personal liability) and one or more limited partners with limited liability. General partners run the daily operations and are supported by the limited partner’s investment and advice. In exchange for assuming more responsibility and higher personal risk, the general partner receives a larger share of the earnings and a salary.

Limited or ‘silent’ partners contribute equity, but are not involved in the daily affairs of the business. They do not receive a salary, but instead accept a return from the business’s profits based on the percentage of their investment. While not wholly involved in the business, limited partners can provide advice to general partners and set them up with valuable business connections. They often retain the right to veto significant business decisions to protect their investment.

Limited partnerships are attractive for investors due to their decreased liability. Most jurisdictions, except for Manitoba, have provisions that revoke the limited liability status of partners if they act or take part in the control of the business.

What are you Getting Yourself Into?

General partners share the burden of the business’s liabilities equally, and this can relieve some stress for owners as they are in it together. This shared liability, however, has a downfall. If one partner racks up large debts or becomes involved in a legal dispute on behalf of the business, both partners are personally liable. Should one partner die or skip town, the other becomes wholly responsible for the debt.

Problems can also arise when general partners have unequal involvement in the business. Hurt feelings can occur when one feels he has to do more to keep up or the other feels she deserves a more substantial portion of the profit.

Besides providing you with the capital to make your business a reality, having an invested party to support you and offer advice can be the best benefit of all.

A limited partner with complementary skills can advise you on areas of the business that may not be your forte or, at the very least, offer a different perspective. Other advantages could come from one partner’s valuable business connections, or another’s experience in the industry.

Owners can run into problems with limited partners if they feel they are overly scrutinized for their business decisions. Disagreements and low rates of returns can anger equity partners. Whatever the format, dissolving a partnership can be very difficult, especially without an agreement.

How can you Help your Partnership Succeed?

While partner agreements are not legally required, like a solid business plan, they will help to guide parties and set rules for operating the business. Contracts are generally prepared by a lawyer and serve to answer the hard questions should a partnership run into difficulties or fall apart. In addition to outlining the responsibilities of each party within the business, they address how conflicts are to be resolved, how profits will be divided and paid out as well as the limit of each party’s liability.

Even with a solid agreement to guide them, some personalities don’t work well together. Look for a partner with skills that complement your own, who is trustworthy, communicates openly and has similar long-term views for the company.

Take time to answer all the hard questions surrounding money and outline how you will deal with them. Who has the final word? How will profits be split? Ironing out these details before you begin may help save your relationship in the long run. All good partnerships take time and require work. They can be the basis of a great business or ruin both your personal and work relationships.

 

Partnership Agreements should Include:

Operating procedures – responsibilities of each partner
Outline of capital investment
Profit share and disbursement
Conflict resolution guidelines
Provisions to address what will happen if a partner leaves or passes away
Framework for the dissolution of the partnership
Each partner’s liability