What to Consider When Becoming a Partner

One of the best occurrences for anyone who works for a partnership, whether it be focused on engineering, finance, technology, or any other business, is the opportunity to become a partner in such company. This was generally such person’s main goal when joining the business, but there are many questions to be considered when considering becoming a partner. The most important issue that arises is, what are the consequences, both positive and negative, from being a partner? Below are a few items to consider:

1. Type of Partnership. Generally speaking, depending on the size and complexity of the company, there are many different types of partnerships. Some well established and complex partnerships contain different types of partners (e., senior partners and junior partners, or managing partners and non-managing partners), which is very important to consider when deciding what will occur if the person decides to become a partner. In smaller partnerships, this may not be an issue. However, it is always an important idea to review, or have an outside attorney review, the governing documents of the partnership to completely understand the type of partnership being considered.
   
   
2. Rights of Partners. One of the most important issues with the type of a partnership is what rights does a new partner have (or not have). Particularly in large, complex partnerships, new partners do not have the same rights of older, more experienced partners. This can relate to voting rights, income rights (including caps for amounts to be received by the new partner for a period of time), and payment requirements (which are based on the value of the company and the governing documents of the partnership). These facts need to be known by the prospective partner, so as to allow the prospective partner to consider all positives and negatives to becoming a partner.
   
   
3. Valuation of Company. As noted above, the valuation of the company is very important with regard to determining whether or not to become a partner. The higher the value of the company, the higher the buy-in will be. However, if the value of the company is quite high, then the potential profits in the future will also be much higher than in a lower valued company. Consequently, the valuation of the company is a very important aspect to consider when determining whether to join a partnership.
   
   
4. Potential Profits or Losses. Finally, the prospective partner must also consider the potential profits or losses that such person would receive in the future if he or she became a partner. As previously mentioned, this is often tied to the complexity and size of the partnership. Partnerships that are large and complex provide a chance for a much higher profit than smaller partnerships, but such large and complex partnerships may limit the prospective partners rights to receive a large amount of such profits for a particularly long period of time. Small, newer partnerships may not include such limits, but could also lead to less profit, or even losses, for such prospective partner if the business is not successful. Consequently, it is always best for a prospective partner to discuss these and any other issues with its counsel before deciding whether to become a partner.