If you need the experience, wisdom, or skills of another person, then take him or her on as a partner. If you need money, access to credit, or contacts, take someone on as an investor but not as a partner. Sometimes you do not have a choice. The people with the money often want to be partners, so they can be close to the action and help make decisions to protect their money.
If you do join forces with investors or partners, make sure you put everything in writing. Your relationship should be clearly defined, along with everybody’s expectations, contributions, and decision-making authority. Make sure you describe what will happen if there are problems or the project turns into a financial disaster. Can the investor demand his or her money early or take over the project completely? Can your partner refuse to perform any more work but still demand a percentage of the profits? These and other similar questions should be worked through with the assistance of a lawyer or a business consultant.
Choose the right structure if you are going to have partners. Details are beyond the scope of this book, but there are generally three common ways to set up a partnership. The most common is what is called a general partnership. Any partner can make decisions that bind the entire partnership. You are all equally liable for 100% of the partnership debts, not just your share of the debts. At the simplest level, there are no formalities and no paperwork. Next up in complexity is a limited liability company. It requires formal paperwork, usually prepared by a lawyer. A lengthy document sets out all the procedures for operating the company. Members are protected from liability unless they sign guarantee agreements for loans or other liabilities. Finally, a subchapter S corporation is very similar to a limited liability company, but generally provides more flexibility regarding long-range plans.