In deciding whether to take on a business partner most people have no clue where to start. They often don’t even know which questions to ask before making the decision to take on a business partner.
The following is intended as a guide, to provoke you and your prospective business partner into thinking more c about why you’re in business together and other issues that might be crucial to the healthy functioning of your business partnership.
1.What Do You and Your Business Partners Bring to the Table?
What do you and your business partners bring to the table? What are your skills, talents, and resources that you and your business partner bring to the table that bring elements for success of your business? How do you compliment each other? How do you and your business partner make for a stronger foundation for your business? Do you share a similar vision? Have you been able to discuss short term and long term goals? Is your business partner bringing something to the table that is more than just money?
2. Management Structure.
Having a conversation about how the company will be managed is not only logical but critical. Here are some guiding questions:
Who will be involved in the day to day activities?
The first critical issue is WHO will manage this company?
How will decisions be made? For example, majority vote, unanimous vote, etc.
What are critical decisions for you that require your approval?
The following are some issues commonly discussed amongst business partners. Review them and consider the impact on your business if at all. Consider whether these things are important to you. Ask yourself, what decisions are important to you for running your business. The following is intended as a guide, so not all of the things listed here may apply to you or your business.
- Day to day activities
- Acquiring property
- Selling or purchasing assets
- Hiring and firing employees, consultants, vendors, legal counsel, accountant, etc.
- Purchase life insurance, liability insurance, and other insurances
- Opening, maintaining bank accounts
- Borrow money
- Lend money
- Institute, prosecute and defend legal, administrative or other suits or proceedings in the Company’s name
- Establish pensions, and incentive plans for any or all current or former Members, Managers, employees, and/or agents of the Company, on such terms and conditions as the Managers may approve, and make payments pursuant thereto;
- Fix salaries for any member, manager, officer, director, etc.
- Collecting funds due to the Company.
- Adoption of any Annual Budget
- Selling the business
- Taking on new members/shareholders
2. Funding the Company.
Have you had a discussion with your business partner about the financial needs of the company? What are the financial needs of the company to stay afloat, and for how long? What is the company’s overhead? What do you need to break even? Will you as business partners be contributing or lending money to the company? What sources of funding have you considered, such as loans vs. investors? Not sure where to start? Start with a qualified CPA i.e. someone that doesn’t just type a tax return for you once a year, but rather, someone that can monitor your business, check in with you periodically, offer critical insight, answer all of the above questions and act as more of an outsourced CFO (Chief Financial Officer). You need a CPA that helps you set realistic financial goals and then stays on top of you to help you achieve those financial goals.
3. Dispute Resolution.
What if there is an important decision that needs to be made and the members are at a deadlock? How will you resolve it quickly and at minimal expense? One option might be to put together an independent board of advisors that agrees to be the tie breaker specifically for deadlock issues. Another option might be to submit the claim to binding arbitration.
4. Your Expectations in the Business.
Will you be receiving Salary?
Will you be receiving any other Compensation?
Will you be involved in the management of the company?
Will you be employed by the company ?
Will you be required to devote a set number of hours per week/month to the Company?
5. Expectations of Your Business Partners.
Will your business partner be receiving salary?
Will your business partner be receiving any other compensation?
Will your business partner be employed by your company?
Will your business partner be expected to spend a minimal amount of time in the company office?
Will your business partner be required to devote minimal number of hours per week/month to the company and its activities?
Will your business partner be able to engage in competing or other businesses?
6. Document the Business Relationship
There is no requirement that a business partnership be documented in writing in order to be deemed a legal “partnership”. All it takes to create a legal partnership is two individuals working together and carrying on together as co-owners of a business for profit. But there are plenty of reasons why you want to document your business relationship.
First, if you accidentally create a legal partnership then the parties to that partnership will have duties and rights as partners, rights and duties which may be far greater than intended.
For an LLC, if you don’t create an LLC operating agreement then the default rules in the LLC Law will apply. This may not be what you want at all.
More importantly though, relationships, including business relationships, fall apart when expectations are no longer being met. But it goes a little deeper than that. Expectations are often not met because people are not making effective efforts to communicate and document their expectations.
The moral of this story is, in order to avoid accidentally creating a legal partnership, or avoid having laws apply to your business that were not intended, any business relationship you enter into should be documented to clearly define the nature of the relationship (i.e. Employment, independent contractor, shareholder, investor, lender, member, etc.) and the expectations and requirements of each party.