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Do You Even Need to Form a Partnership?

Before you get into the nitty-gritty of contracts and cost sharing, ask yourself if you actually need a partner.

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Dear Norm,

My wife and I have a 12-year-old business making and selling custom boat covers. We also have a separate business selling kayak covers online. We sell just over 100 kayak covers a year, and our profit is about 50 percent per cover. We think we could sell as many as 2,000 a year, but we don't have the capacity in our shop. We do business with a guy who has set up sewing plants for large companies; he has offered to set up a shop to make our kayak covers. He'd handle the production, and we'd handle marketing and sales. Is there a standard way to divide up the costs, responsibilities, and profits in this type of partnership?

--Jim Perillo, Custom Canvas of Charleston, Charleston, South Carolina


When setting up partnerships, you need to beware of two common dangers. The first is that, as a typically optimistic entrepreneur, you may not think clearly enough about what could go wrong. The second is that you'll make things more complicated than they need to be.

Right now, Jim Perillo is earning a nice profit on his kayak covers. He has a seamstress who sews them, as well as his other products. His would-be partner (let's call him Steve) would take over the kayak-cover work and get half the profit on them. To me, that's like giving half your profit to an employee. I'm not saying it's wrong, but Jim ought to realize what he's doing. There's also a chance that the partnership won't work out. In that case, Jim would want to take the business--and the profit it generates--back in-house. So he needs to build into any agreement a way to dissolve the partnership.

That said, I told Jim I didn't see why he needed to form a partnership at all. It has already been agreed that Steve will set up the manufacturing operation on his own. He'll buy the equipment, lease the space, hire the people, and put up whatever capital is needed. Jim will own the product designs and retain exclusive contact with customers. In effect, Jim is simply outsourcing the manufacturing of kayak covers. So why complicate matters by creating a formal partnership? Why not simply have a contract giving Steve the exclusive right to manufacture Jim's kayak covers for, say, a year or so, subject to any conditions they agree upon? And why not spell out in the contract what Jim would pay Steve for the covers he produced? Such an approach would simplify things and save on legal fees, and they would still have the option of forming a partnership at some point in the future.

Jim liked the idea and said he'd let us know what happens. 

 

Last updated: Dec 27, 2012

Street Smarts columnist and senior contributing editor NORM BRODSKY is a veteran entrepreneur who has founded and grown six businesses.
@NormBrodsky




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