Last week we talked about going into business by yourself. However, many times starting a business by yourself is a lonely undertaking that you don’t want to do and finding a business partner can seem harder than finding a significant other. When looking for the perfect business partner, some people start to think that the person they have decided to share their (non-business) lives with would be the perfect match. What better person to go into business with than the person that you live with, possibly have children with, and want to spend the rest of your life with?
While sometimes this works, before going into business with your spouse, significant other, or life partner you really need to think about it. Relationships are stressful – adding on the dimension of being business partners in addition to life partners can make, or many times break, a relationship. You may have different ideas of the type of business to start, the way to run a business, or the way to handle the finances of a business. In addition, you have no separation between your personal life and your business life.
Legally, there can be additional issues to tackle. When setting up a business owned by a married couple, discussions need to take place about what will happen to the business if the couple gets divorced, how the business will be financed, and how the business will be treated for estate planning purposes. If there is another party also in the business, even more careful planning needs to take place to make sure the business isn’t disrupted if there is martial disharmony between two of the owners that will affect the other (non-married) owners.
Tax-wise, when a business is going to be owned by a married couple, there may be different options for the tax treatment of the business. For instance, the couple may decide only to have one owner and be treated as a sole proprietorship, may decide to be treated as a partnership, or may elect for c-corporation or s-corporation status (setting up the appropriate legal entity for the type of tax entity selected of course). Discussions with the couples’ CPA to determine what tax treatment is best for the business are essential and should include tax planning and estate planning discussions.
If the business is owned by a couple who is not legally married (even if the couple is engaged and planning on being married), then the business should be set up just as a business would be between two partners who were not romantically involved. With a legally married couple, should the couple decide that they no longer want to be involved with one another, typically the couple is headed to divorce which means the splitting of the assets would be handled during the divorce. However, if a couple is not married, then if the couple decides to separate, the assets would be divided as decided by contract or by a court. In most cases, it is easier to decide how you would want assets split when you are still friendly (i.e. when setting up the business), rather than waiting until you want nothing to do with the other person. In addition, non-married couples need to have estate planning done to ensure that the person they intend to get the business actually does as the default rules for non-married couples are different than married couples. Again, a discussion with a CPA is needed to determine the tax treatment of the entity also.
Putting the legal issues to the back burner, opening a business is stressful emotionally and financially. Having one person in a relationship become self-employed can put a strain on a relationship. Having both people in a relationship become self-employed at the same time can be devastating if the business is not financially successful. Many times, even if a couple both want to start a business, one may want to consider staying at a paying job until the business is up and running. These are things a couple will want to discuss to make sure they are really ready to take the plunge before they do it.
If you have any questions about starting a small business with your significant other, please feel free to call me, your Denver business lawyer, at 720-258-6647 today!