So far this month, we have gone over starting a business by yourself and with your significant other. This week, we are going to touch on starting a business with a partner (or partners). In many cases, people determine that they do not want to go into business by themselves and that their significant other, while a great match for a life partner, is a terrible match for a business partner. After coming to these realizations, the hunt begins for a great business partner.
In some cases, business partners enter the picture like many other people in your life – without trying to find someone that is a perfect match, it just happens. It may be that you have a business and hire someone that ends up a great match for becoming a partner. Or it may be that you have someone that you have met through work or other social circles that is a compliment to you and would work great as a business partner. In other cases, it may take more work. You may have to attend networking events or search someone out to find someone that will work as a partner.
When determining if someone is a good business partner (regardless of how you met them), you need to ask a lot of questions. Going into business with someone is like marrying someone – and many times there is a lot more emotional and financial entanglement between business partners then even spouses. With a business partner, your livelihood is going to depend on what they do in regards to the company that you jointly own. Depending on how the business is set up, many times financial decisions will need to be run by them and approved by them in many cases. You will want to know what the person brings to the table (both financially and skill-set wise). Questions such as how many hours does the person want to work, what are their long term goals, what are their short term goals, how to they work with customers, what are their business plans, what are their strengths and weaknesses, and how they deal with difficulties are just some of the things you want to know before you enter into business with someone.
Legally, when you go into business with someone you need contracts between the two of you. You want to decide prior to having issues how you are going to deal with them – and you want this in writing. If you have an LLC, this is accomplished through documents such as an Operating Agreement, Membership Agreements, and Buy Sell Agreements. If you have a corporation, you will have Bylaws and Shareholder agreements. Careful drafting of these documents is a must as just like marriages, many business marriages fall too.
Tax wise, if you are going into business with partners, a careful look at all of the partners’ financial lives is necessary. While an s-corporation may be best for one partner, it may be that a partnership (as far as taxes) is better for another partner. If it ends up that different tax structures are better for different individuals, then this will be one of the first decisions that the partners will need to make. It may even be that due to the partners that are going to be included in the ownership, certain tax entities are unavailable. Therefore, in addition to having an attorney help structure the business and write the business documents, discussions with the CPA should take place early on.
If you have any questions about going into business with a partner or partners, please call me, your Denver business lawyer, Elizabeth Lewis, at 720-258-6647 today!