The vast majority of home-based businesses are sole proprietorships – according to the SBA a mere 4% of firms based out of a private residence operate as partnerships. And while going it alone may fit the standard idea of a home-based business, running yours with a partner can be a real boon for your burgeoning company. Not only is the total number of partnerships on the rise, but according to the IRS, the average revenue of partnerships grew at triple the speed of sole-proprietorship between 1980 and 2007.
So why the low number of home-based business partnerships?
Well, running a business from your home is a very personal undertaking, and it’s uncomfortable inviting someone into your house to help run a company. But if you think someone would make a great business partner, and you can move past that discomfort, a partnership may be a great option for your home-based business as long as you properly set it up.
Decide Exactly Where You’re Going to Work
One of the trickiest parts to running a home-based business is corralling off an area specifically for your company. It’s very easy to let your home and professional lives bleed into each other when a door or hallway is the only barrier separating the two. Running a partnership from home makes this arrangement even more complicated, so it’s important to set boundaries early on.
Having one, set location makes everything – from taxes to logistics to mailing – easier, so decide from whose house you will run the business, and stick by that choice. Just know that running a business from your house is stressful, and having someone else coming in and out compounds that stress. Using a space with a separate entrance, like a garage, is preferable so the partner who lives outside of the house can just walk in whenever they want to head into the office.
Clearly Define Each Partner’s Role
The partner from whose house the business is run may immediately have the upper hand in a very delicate power dynamic. Business partners must be seen as, and truly feel like, equals, otherwise arguments will tear the company apart. Make sure, then, to set out exactly who will do what from the outset. There is a reason why you, or your partner, wanted to bring another person into the business. Maybe one person is better at finances, or marketing, or came up with the initial idea for the company. Whatever the reason, make sure to talk it through and outline each person’s responsibilities, so everyone knows what they are expected to do.
Put EVERYTHING in Writing
Your DBA, business registration, tax information, licensing, and permits are not the only paperwork needed before your partnership can open for business. Put everything that’s been discussed – from location to job description – in writing. A standardized partnership agreement is not a legal requirement, but it’s a document you will never regret having. When writing, at the very least put in the percentage of ownership, profit entitlement, debt obligation, expected duties, mediation guidelines, and from whose home the business is run. I know that this may feel unnecessarily formal, but failing to draft an agreement could cause a lot of problems if the business doesn’t work out, or one of the partners wants to leave.
Conclusion
Running a business is hard work, and running it from home does not make it any easier. In fact, as most home-based entrepreneurs will tell you, it comes with its own unique set of challenges. However, if you take your time, outline what is expected from each party, and ensure everything is in writing, home-based businesses and partnerships go hand-in-hand. Business partners should never enter their relationship lightly, but if your acumen and talents are complementary, your home business may be more successful than it ever could have been as a sole proprietorship.
Ray Litten
Nice article but I was hoping to find advise on how you would handle any form of compensation for providing the workspace for the partnership. I am considering building a large addition to my home which will include a large workshop with a separate entrance that would be used exclusively for my wife’s and her friend’s craft business which they are trying to get off the ground. (The rest of the addition would be a family room and bedroom.) As the homeowner, should I charge a nominal “rent” to the partnership or should I just provide the space without compensation for the sake of the business? If the business were to grow into something bigger and move out of the home or end for some reason, I would still have the space as part of my home.
Ray Litten
I should add that I’m not trying to make any kind of profit from their business and would just as soon as charge them nothing out of the hope that they are successful. The question is more regarding how the partnership should handle the fact that one person in the partnership is providing the workspace for the business and whether the business should consider the use of that space as an expense and pay for it even if it were just a token amount. Certainly it would have tax implications but there’s also the “who’s providing what in return for what” between the partners to consider.
Holly - The Work at Home Woman
Hi Ray,
You’ll want to talk to an accountant, but, I believe, your wife should be able to deduct the workspace as a dedicated home office space on her taxes. As far as charging her partner rent, that is a personal decision that only you and your wife can make.
Good luck with your decision!