When Is the Right Time to Bring on a Business Partner?
For five years, Gil Gildner worked as a sole proprietor, freelancing in over 40 countries and running his media consultancy. “By all accounts, I was moderately successful. But it wasn’t going anywhere and I wasn’t happy with the trajectory. I felt stalled.”
In early 2017, Gildner made a change. He founded Discosloth, a global digital advertising consulting firm—but with a partner. “My partner, Anya, has been an instrumental part of the successful launch,” he says. “There are many things I’m not the best at. Anya is better at these, which leaves me room to do the things I’m most skilled at.”
Gildner’s story is similar to one lived day in and day out by other sole proprietors, or “solopreneurs.” Starting a business can be lonely and overwhelming. Solo operations can be prone to stagnation and burnout when overpacked days are so devoted to immediate needs that growth and long-term strategy get overlooked. Sometimes a sole proprietor needs a partner.
But how do you know when?
We asked several entrepreneurs and business advisors to share their best advice on when to bring on partners—and how to know if you shouldn’t.
Entrepreneur Gil Gildner, via his website.
Partners or employees?
Simply adding employee positions can seem the most obvious choice. For the sole proprietor who doesn’t want to dilute ownership, that can be the right move.
However, adding business partners provides something that hiring employees do not: the motivation and dedication that comes from having a stake in the business. An employee typically has the freedom to leave their job for another at any time. Giving a partner some share of your business can result in an uptick in motivation and dedication. They have a vested interest in persevering through challenges and helping the business become stronger and more profitable.
Since partnership means sharing ownership, it’s not a decision to take lightly. Sometimes it makes sense to retain ownership and decision-making power yourself. “Go solo as long as you possibly can,” says Jim Jacobs, president at recruitment service Focus Insite.
“The right partner can be incredible to the success of your business. But the reality is, there are plenty of excellent employees out there. If you focus more on your business process, then get the right people to execute that process, you will be in great shape. “Unless you are looking at exponential growth of at least ten times, I’d never take on a business partner.”
But partners can be essential to return a business to stability and growth if you are careful about the structure of your agreement, says Deborah Sweeney, CEO of business formation service MyCorporation.
“Think about the dilution of your ownership as you take on partners,” she cautions. “Have a partnership agreement in place where your roles are clear. Make sure you do your due diligence with regard to this person, the amount of your business you are giving away as part of the partnership and the long-term goals of each of the partners.”
It’s a big decision. “Entrepreneurs should consider their co-founder relationships as intentionally as they would consider a life partner,” says Brett Cenkus, founding partner at Cenkus Law in Texas and author of Partner-Proofing Your Partnership.
Key reasons to take on partners and share ownership include:
- Reducing the burden on your time and energy
- Sharing challenges and opportunities with others who can help the business grow beyond what you could accomplish on your own
- Reducing the risk of turnover by adding partners instead of hiring employees
Here are some other important factors to consider.
Enhanced perspective, innovation, and skillsets
Bringing on one or more partners can also bring a breath of fresh air. Instead of relying on your perspective, creativity, and skill sets, you’ll build a team of equals whose combined skills and ideas enhance the business.
That’s been Gil Gildner’s experience. “Our skill sets are complementary in many ways. Anya is very methodical and analytical, and brings a level of excellence to our work that I couldn’t dream of reaching,” he explains. “I enjoy reaching out to clients, branding ourselves, and developing new business.”
Having a partner can mean “an A-player at every position,” says Taylor Jacobson, founder and CEO of business accountability community Focusmate. A veteran of multiple “successful and unsuccessful” sole proprietorships and partnerships, Jacobson has guided other entrepreneurs on their own partnership transitions. He sees partnership as an opportunity for entrepreneurs to shed broad duties.
“When you focus on a narrower domain, you discover nuances you never knew were there,” says Jacobson. “Building this nuanced understanding of your domain is what gives you a competitive edge, and a financial one. By focusing on your core area, you accelerate your growth and can differentiate yourself from competitors.”
Marissa Ryan agrees. After three years as a solopreneur, she joined forces with two partners to form VisualFizz, a digital marketing agency in Chicago. She sees her partners as a stabilizing force.
“If you’re solo, you have to be the business developer, the project manager, the hiring manager, the client partner, the quality assurance check, the accountant; the list goes on and on, all while keeping growth in mind,” explains Ryan. “If you divide these responsibilities, you will be able to focus on doing a few things extremely well. The stability of your growth and of your company will be much greater.”
Navigate opportunities and challenges
When you work all on your own, it can be challenging not only to deal with downtimes in your market and industry but to fully pursue growth opportunities.
Cody Schuldt, CEO of Houston-based Spartan Digital, had six employees and a six-year track record running his digital marketing company. However, he saw a trend of web design firms closing down. “The surviving few web design companies offered SEO services,” says Schuldt. “I tried my best to learn SEO. I even tried to outsource it to India and failed miserably.”
Schuldt considered creating an SEO-focused employee position, but he knew from his network and industry knowledge that SEO employees were hard to retain. “They are known for picking up and leaving if they gain a strong customer base,” he explains. Partnership provided a stake in the business and lowered the likelihood of losing a needed asset. “The only way I would be able to keep an SEO guy under my belt is that I would have to give up a percentage of the company to motivate him to stay.”
Eventually, Schuldt partnered with an experienced SEO specialist that he knew from high school. Together, they put the business on a new trajectory. “Now we have very handsome monthly retainers coming to the business, and ongoing business to keep us afloat while at the same time allowing us to grow and market ourselves further,” says Schuldt. “Partnering up was the best thing I’ve ever done.”
Improve your offering and grow the business
Working solo can cause stagnation, and your business can suffer from a lack of perspective.
“Joining a partnership can increase and improve your offering,” says Marissa Ryan. “It keeps you accountable for your work and performance.”
Ryan and her partners keep running lists of interests they want to pursue. It keeps the business fresh, helps them push each other in new directions, and “helps us keep an eye for projects that would support growth.”
Transparency, conflict management, and a solid agreement
Conflict follows partnership. The key to resolving conflict is transparency, communication, and mutual respect, says Marissa Ryan. She and her partners have found it essential to define their respective roles in the greater organization, and evolve them as the team gains experience working together.
“We are open about our strengths, clear about our responsibilities, and set aside times each week for open conversation and dialogue,” says Ryan. “By clearly defining each partner’s responsibilities, we are able to avoid miscommunications and confusion.”
Ryan also recommends keeping an eye out for skill set gaps: they can be a sign that it’s time to bring on a new employee or partner.
“When conflicts inevitably arise, it’s important to stay solutions-orientated and to respect each person’s viewpoint,” she adds. “The way we at VisualFizz handle differing viewpoints is to run experiments whenever we can. We apply learnings drawn from deep data analysis to our client projects. We take the same approach to our own growth. Constantly test. Don’t consider one idea better until there is hard evidence. Chances are, there are many correct answers. You can use what you’ve learned from experimenting to guide you on which answer is the best for you.”
No matter the entity, arrangement, or number of partners, a detailed, signed partnership agreement is also essential.
Each partner needs to know:
- Their ownership percentage of the business
- Their responsibilities to the organization and their fellow partners
- The exit strategy or protocol for circumstances where a partner needs to leave the business
Upfront understanding prevents future problems
Aligning interests, responsibilities, and objectives are essential not only at the beginning of the partnership, but on an ongoing basis. It’s important to regularly discuss and align goals and expectations, says Steve Replin of the Replin Law Group in Denver. Partners need to understand how they plan to share not only workload, but also profits and any spotlight or recognition.
Do a trial run and set concrete measures of success, suggests Taylor Jacobson. “All my bad partnerships were made in haste. At Focusmate, both of my partners joined after trial runs of three to five months. You can guess which worked out better.”
Taylor recommends the potential partners set concrete objectives, work together on a relevant project, and then evaluate how it works out. “People are usually on their best behavior in a test run,” he adds. “If you don’t see the results you want, that’s a sure sign that a more permanent partnership isn’t likely to pan out. Execution is king, especially in tiny ventures. Look for partners that do great work, quickly, and do what they say they will.”
How to convert from a sole proprietor to a different entity
Over 16 million Americans are full-time independent workers. Many file their taxes as sole proprietors—but that doesn’t mean it’s the best choice for their business or their lives. Entrepreneurs need to figure out what type of entity works best for their operation both now and down the road. Not thinking this through can lead to challenges that threaten survival, such as growing too fast, not tracking finances, overspending, poor execution, and an inadequate business plan.
While sole proprietorship is the fastest and most basic way to structure a business, says Craig M. Morgan, Esq., managing attorney and consultant at Providence Law in Charlotte, North Carolina, the side effect of full liability and personal exposure make it a “terrible choice.”
At the least, “a single-member LLC is much better than a sole proprietorship,” says Morgan. Depending on the laws in certain states, such as Morgan’s own North Carolina though, a multi-member LLC may offer additional protections that a single-member LLC does not.
When changing your business entity and adding partners, you can consider options including a partnership, limited liability company (LLC), or corporation (C, S, or B). The process for changing your business structure varies depending on where you and your partners are located, your industry (and any relevant regulations), and what sort of entity you plan to change to.
Here are some resources to help you make this crucial decision:
- Legal Entities, Licenses, and Permits | Bplans
- Converting a Sole Proprietorship or Partnership to a Single-Member LLC | Nolo.com
- The Complete Guide to Choosing Your Business Structure | Bplans
- How to Change a Sole Proprietorship to a Partnership When One Partner Is in a Different State | LegalZoom Legal Info
When changing entity, evaluate the options for your business, industry, and area of operations. “If moving from a Sole Proprietor or General Partnership to LLC or Corporation, you and your partner(s) will move from unlimited personal liability to limited liability,” explains Charles Vethan, Esq., founder and CEO of Vethan Law Firm, which works with businesses in Texas and California.
“You will have more paperwork to file, and you will see increased fees and expenses. Notify your bank and insurance company since you may be required to transfer assets. You may need to file a new DBS and/or a new EIN. Let state and local agencies know of the change as well as your suppliers and customers.”
Time to team up
Changing your business from sole proprietorship to some form of partnership isn’t for everyone. But with twenty clients and a trajectory for “significant organic growth,” Gildner is glad he made the leap.
“Two founders that share a common vision can be very stabilizing for each other,” he says. “In the long run, it will result in much higher profitability and success.”
Editor’s note: This article originally published in 2017. It was updated in 2019.