The beginning of any business is not only a crucial time to discuss how the partners will work together, it is also a wonderful time to have these discussions, since all partners are optimistic about their future business, and therefore in a great mindset for compromise. When partners clarify their roles and their goals at the starting stage, they have a higher chance for success, and an easier time managing inevitable conflicts that will occur between or among partners.
Financing of Company
Together, you and your partner or partners should develop a business plan, with generous considerations for budgeting, knowing that the startup mantra is “projects take twice as long and are twice as expensive as planned.” Don’t just do a quick internet search, get real estimates on costs. Research coworking spaces. Call manufactures, see what the charges are for small orders. Shop fabric stores. Plan out marketing costs, including attending trade shows, craft fairs, networking events, and one-on-one networking meals. Talk to other fashion entrepreneurs to further identify possible costs.
a. Personal Finances
Discuss with your partners how much of your own personal finances you are willing and able to contribute to the business. Additionally, discuss with them if there will be an expected repayment plan, where the business will reimburse the partners for their initial personal investments into the business.
You may also want to chat about your personal finance needs, and the income you’ll need to maintain your planned standard of living. It is beneficial for everyone in the partnership to share expectations and personal needs.
Aside from personal capital, you and your partners may want a business loan. These types of loans are often secured by personal property of the partners, such as a home. Chat with your partners about your options of securing business loans and your comfort level of using personal assets to as loan guarantees. You’ll likely need a business plan prepared for loan officers, so do your research into your costs of creating your clothing or accessories line, or the startup costs of providing your services. Factor in the expenses of government filings for business formation (such as a business license, a fictitious business name, a garment manufacturing certificate, and incorporation fees).
Most new businesses seek outside investors, exchanging a percentage of ownership in the company for funding. If your partnership is considering this option, have a discussion about the amount of ownership you are willing to give up for funding, the type of investor (including special skills & knowledge) you are looking for, and the amount of funding you will need for each step of your business’ foreseeable future.
Type of Company
So far, we have been generally using the terms “business” or “partnership” to describe your business venture. However, it is important that you quickly incorporate your business to become a separate legal entity. When a partnership is left as an informal venture, the assets of all partners are equally responsible for the tasks of any member in the partnership (when partner is attempting act in furtherance of the partnership). By incorporating, you are helping to create a legal boundaries between the acts of the partners who are acting to further the partnership, and personal assets of the individual partners. This means that the assets of the business will be responsible for acts of the partners, but not usually their personal assets or the personal assets of their partners. With the assistance of tax & legal specialists, you and your partners should educate yourselves on the various types of legal entities that your business can be, and the various legal protections.
Division of Labor & Roles within Company
In an early discussion about your business, you’ll naturally find yourself assigning certain roles to each other within the business. One of you may be more of the creative expert, the type who will design clothing, marketing campaigns, or prepare events for clients. The other may have financial skills, sales skills, or organizations skills. Talk with each other about your strengths and weaknesses, but also keep in mind that each of you will need to take on tasks that may likely be outside of your expertise. In a small business, all roles need to be filled by just a few people, so be ready to accept challenges beyond your comfort zone.
a. Time Dedication to the Company
Each partner will have a variety of personal and other personal commitments that you can expect to encounter during the first year of business. This includes family obligations, planned vacations, & work commitments outside of the partnership. It is common for partnerships to break down when one person feels that they are dedicating significantly more time or effort to the business. Have an open conversation about what you each can realistically contribute
b. Threshold of Performance to Maintain Partnership
After you have talked about your roles at the company and the time commitments that you expect to give, you may want to set milestones of time commitments or accomplishments that each person is responsible for contributing. Often, newly formed partnerships have people who are excited about the idea or concept, but usually, not everyone is successful at following through with the plan. Being honest about this possibility can help you create a smoother point of separation, should a partner not follow through with planned commitments.
Long Term Plan: Grow or Sell
While it is difficult to project how a business will develop, it is important that partners think about their end goals for the business. Some partners may be dreaming of the big buyout check that comes from acquisition and therefore will want to structure the business in ways that is marketable to a future buyer. Other partners may wish for the company to become a life-long career, something that will slowly grow with their lives. Let each other know what your long term vision is for the business, and make sure those visions align.
For More Guidance with Partnership Discussions
Law On The Runway has previously teamed up with Whizkins to provide a partnership worksheet. This partnership worksheet can be used to guide the conversation, and ultimately, you will want a formalized partnership agreement drafted by an attorney. To access this free worksheet: https://whizkins.com/stores/lawontherunway/
As with all Law On The Runway blog posts, this information is not meant to be used as legal advice, please contact an attorney to receive legal advice. If you have questions about this blog post, email Rachel@lawontherunway.com