Structuring Business Relationships
When considering the development of relationships in business to support your business activities, three important characteristics come to mind. These are functionality, flexibility, and protection.
Functionality is the purpose for the business relationship. Does it exist to help your business grow, or to keep your business operations legal, or to clean your office building?
Flexibility is allowing the people inside the business relationship to fully fill their potential rather than being stifled by the relationship.
Protection is keeping those within the relationships free from lawsuits or financial disasters.
All three of these reasons relate to the individuals and the business entities that may become involved in these business relationships.
Here are a few of the key types of business relationships that are commonly formed by business owners.
- Employees—The government looks at employees as kind of a default position. If you do not set up your arrangements with people that you work with to conform to certain requirements, then these people will be classified as your employees, and you must provide benefits, tax withholding, office equipment, etc. The extra costs of having employees may or may not be avoidable, but many business owners would rather work with Contractors, Joint Ventures, etc. if they can.
- Contractors—More commonly known as Independent Contractors, or 1099 Contractors, these are individuals who perform a service for a fee and are not held under the constraints of employees. They can set their own hours, work from wherever they wish as long as they can provide their service, and they provide their own business tools, insurances, etc. From an administrative standpoint, this is a much easier relationship to manage. I have very seldom felt a need to have employees with my businesses and have chosen other ways of setting up my business relationships, relying heavily on independent contractors. Independent contractors can provide a variety of roles, ranging from sales or training, to bookkeeping and tax.
- Joint Ventures—A joint venture is a kind of partnership that is limited to certain specific elements of a business, without disturbing other aspects of a business. For example, let’s say that a company that produces dog treats decides to work with a vitamin company to produce a dog vitamin in a dog treat. They decide to create a whole new brand and they call it “DogVites.” They form a separate company, and the owners of that company would be the dog treat company and the vitamin company. That is a joint venture, and the success or failure of “DogVites” is separate from the success of the two owner companies. I am an advocate of Joint Ventures as they tend to isolate a new venture from other already established businesses and their activities. It can create a limited risk situation and a chance to try out partnering together without bringing new partners into your already established business. I have done joint ventures with my real estate investing, on a one deal basis before even considering a more comprehensive partnership.
- Partnerships—A partnership is a combined ownership of different individuals or entities in a business. It goes beyond the joint venture arrangement and comes with greater risk. Due to this greater risk, a company will generally want to create business creation documents and add a comprehensive partnership agreement that identifies the roles of the partners, their compensation, shares of ownership, steps to dissolve the partnership if needed, rights of inheritance, limitations on the rights or actions of individual partners to act on behalf of the business, and penalties for failure to comply with other clauses in the partnership agreement. Since partnerships are generally long-term, it is important to realize in advance that a bad partnership can be worse than a bad marriage, and also that honest people have no problem demonstrating their honesty in writing.
- Business Services—These relationships involve the provision of certain services by outside companies. Examples of these services would include legal services, accounting services, cleaning services, IT services, etc. Companies often establish service agreements with companies who provide these professional services, rather than hiring attorneys, cpas, etc., and having to pay them a full or part-time salary. They pay for services on the basis of anticipated usage rather than paying someone to sit around and get paid because you don’t have anything for them to work on right now. It is imperative that you find good qualified people to provide these services, such as IRS business filing rather than cpas who are only versed in individual tax filing.
- Suppliers—A supplier is a company or individual who provides either finished products at wholesale or materials used in the production of products. These relationships are managed either by individual orders, or by a supplier agreement that identifies multiple future orders for these products or materials.
- Customers/Clients—The most important relationship that a company has is with the people it supplies products or services to. Without them, the company has no reason to exist, and they provide the income that allows the company to continue to exist.
In other articles, we will discuss ways to create, build and grow these relationships, particularly with customers. Our goal is to continually provide you with thoughts and ideas that can help your company to achieve a high level of success.