Business Partnering 101
Oral Agreements Aren’t Worth the Paper They’re Printed On
Going into business with someone is similar getting married and while pre-nups aren’t for everybody, they are a must for the business partners. The time to come up with a partnership agreement is not the moment when the do-do hits the fan – and it will.
Before forming a partnership, potential new business owners must first ask themselves several key questions:
- What does each of you bring to the business? What skills and attributes does the partner possess which will add value to the business?
- What will be your specific roles?
- How many hours a day does your partner expect to put into the venture, and does this meet your expectation?
- What are your personal and professional goals? Where do you see this business in 5, 10, 15 years?
- What’s your spending style and credit score? Your partner’s? As in a marriage, lenders consider both partners’ credit history.
- Do you have similar values?
- Does your potential partner have as strong a commitment to the business as you do? Does your partner have other interests or commitments which may impact his or her participation in the venture?
- How will decisions be made? Who will be in charge?
- What if a partner wants to leave?
- Can a partner be fired? By whom? For what reasons?
At this point you should be getting a sense of where an undocumented partnership could go awry and how important it is to work through these and many more questions before starting a business with a partner.
Thinking you may not need a partner? An excellent question and one you should ponder long and hard before taking one on.
In agreement so far? Now you’re ready for the next step, which is to decide on the type of business entity you wish to form, whether that is an LLC (Limited Liability Company), partnership or corporation.
The term LLC is batted around like it is the latest, best and only type of business formation on the planet. Actually, it is a legal entity to offer some protection of personal or non-business assets. You must choose a state in which to register this entity and you must decide how you will be taxed. If you have a partner, your choices are partnership or corporation. These are the first of many decisions you and your partner(s) must make at the beginning of this entity choice or suffer the consequences of missed tax and/or accounting somewhere down the road. Whether to go the partnership or corporation route depends on several factors. A business tax accountant is a good resource to explain the advantages and disadvantages for each and can offer a recommendation as to which may work best for you and your business.
Your next steps are to select the appropriate document and fill it out completely. There are a variety of documents on the Internet from which to choose (enough to make you dizzy), ranging from free on up. A word of caution: a click-and-print choice doesn’t mean you can just scan through the doc, sign and be on your way. They are boilerplate agreements which may need to (and often should) be customized. For this reason the cost of a good attorney specializing in business formations will be well worth it to make sure all of the bases are covered in this important document.
After making your choice, paperwork must be filed with the Internal Revenue Service and the state in which you are forming your entity. Your attorney can help you do this.