S Corp: The “Reasonable Salary” Requirement

An S Corp owner has to receive what the IRS deems a “reasonable salary”. Essentially this means that if you have a company that has made the S-Corp election, then you as an owner-employee have to receive a paycheck comparable to what other employers would pay for similar services. If there’s additional profit in the business, you can take those as distributions, which come with a lower tax bill i.e. big-time savings.

I discuss tax benefits of an S Corp in a separate post with some simplified examples.

Here, we’ll just focus on this mysterious “reasonable salary” requirement. To simplify this you must understand that there are two ways to earn income as an owner of an S Corp: (1) salary and (2) distributions. Salary is subject to payroll tax (15.3%). Distributions are subject to income tax but you don’t have to pay self-employment tax (15.3%) on distributions. In fact you don’t pay any tax on distributions if the distribution doesn’t exceed the tax basis. But ignore that lest sentence if it was confusing.

So as an owner of an S Corp the temptation is to take everything as a distribution because you’ll pay very little tax (just income tax, if any). For example, if your company, an S Corp, is making $100,000 you might be tempted to just pay that entire $100,000 to yourself as a distribution. In doing that you would avoid any payroll taxes or self-employment taxes and only be subject to income tax (if any). That means significant savings from a tax perspective.

Based on the above scenario, the IRS wants you to pay yourself a reasonable salary so that you aren’t paying everything to yourself as a distribution and avoiding taxes altogether. Surprise surprise, the government wants you to pay taxes. In fact, if you did pay yourself everything in the form of distributions and you were audited, the IRS might recategorize some or most of those distributions as salary and you’ll be subject to some substantial penalties.

But how do you figure out what a reasonable salary is exactly? Well, what do workers in your role get paid by similarly situated employers?

The IRS considers some of the following factors in determining whether you’re paying yourself a reasonable enough salary:

  • Training and experience.
  • Duties and responsibilities.
  • Time and effort devoted to the business.
  • Dividend history.
  • Payments to non-shareholder employees.
  • Timing and manner of paying bonuses to key people.
  • What comparable businesses pay for similar services.
  • Compensation agreements.
  • Use of a formula to determine compensation.

If you still don’t know the answer, you can also consult the Bureau of Labor Statistics which publishes detailed salary information for many occupations and professions.

S Corporations: Tax Advantages

Being taxed as an S Corporation certainly has its advantages.

That’s something you may hear quite often, but what does that actually mean?

Let’s take a look at two simplified examples:

Example 1:

You have a sole proprietorship, you receive $100,000 in income. How is that taxed?

There is a self-employment tax of 15.3% on the $100,000 ($15,300.00).

That $100,000 is also subject to income tax.

Example 2:

Now let’s say you have a company that is being treated as an S Corporation. Company receives $100,000 in income. How will that get taxed?

Assuming $50,000 of that $100,000 goes to you as salary and the other $50,000 as a distribution, you pay your payroll tax (also happens to be 15.3%) on the $50,000 salary ($7,650)

That remaining $50,000 distribution is subject to income tax.


You save potentially a lot of money in taxes from having a company that elects to be treated as an S Corporation. There are some other limitations on this scenario but these are the basic principles when one refers to the Self Employment Tax Shield i.e. a shield against having to pay high self-employment taxes.

Getting Your Tax ID (EIN)

Getting your Tax ID is a relatively simple process. Click HERE to get started.

You’ll need:

Your social security number, and

Address for correspondence.

You can get it online instantly.

Takes about 7 minutes

Do You Need to Register for a Certificate to Collect Sales Tax?

If you will be making sales in New York State that are subject to sales tax, you must register with the Tax Department and obtain a Certificate of Authority. The Certificate of Authority gives you the right to collect tax on your taxable sales and to issue and accept most New York State sales tax exemption certificates. Generally, the seller collects the tax from the purchaser and remits it to New York State. If you expect to make taxable sales in New York State, you must register with the Tax Department at least 20 days before you begin business. 

See below or click HERE for information on a Certificate to Collect Sales Tax in New York

If you have any questions on whether or not you are required to register, see Tax Bulletin Do I Need to Register for Sales Tax? (TB-ST-175).

Applying for a Certificate of Authority

To apply for a Certificate of Authority use New York Business Express.

Your application will be processed and, if approved, we’ll mail your Certificate of Authority to you. You cannot legally make any taxable sales until you have received your Certificate of Authority.

Types of Certificates of Authority

The Tax Department issues two types of Certificate of Authority for sales tax purposes, regular and temporary. The type of Certificate of Authority you need is based on the expected duration of your business activities. The same form and application process are used for both types of certificates; however, the temporary certificate will be issued with a beginning and ending date.

Regular Certificate of Authority

You must apply for a regular Certificate of Authority if you will be making taxable sales from your home, a shop, a store, a cart, a stand, or any other facility from which you regularly conduct your business. It does not matter whether you own or rent the facility.

If you make sales at a show or entertainment event, such as a craft show, antique show, flea market, or sporting event, you must apply for a regular Certificate of Authority, even if your sales are only on an isolated or occasional basis. The department no longer issues the Certificate of Authority for Show and Entertainment Vendors that was previously issued for these vendors. See TSB-M-08(13)SChanges Regarding the Issuance of Certificates of Authority to Show and Entertainment Vendors.

Temporary Certificate of Authority

If you expect to make taxable sales in New York State for no more than two consecutive sales tax quarters in any 12-month period, you may apply for a temporary Certificate of Authority. In determining whether you meet this requirement, keep in mind that the sales tax quarters are: March 1 through May 31, June 1 through August 31, September 1 through November 30, and December 1 through February 28 (February 29 in a leap year).

Show and entertainment vendors may not apply for a temporary Certificate of Authority; they must apply for a regular Certificate of Authority.

To request a temporary Certificate of Authority, you must indicate when you expect your business operation to begin and end. The temporary certificate will only authorize you to collect tax and conduct your business between those dates. 

However, even if you are eligible to obtain a temporary Certificate of Authority, it may be to your benefit to apply for a regular Certificate of Authority. A regular certificate provides flexibility to continue your business without reapplying for a Certificate of Authority each time you begin business again. You may not apply for more than one temporary Certificate of Authority for any 12-month period.

For additional information on the types of Certificates of Authority, see Publication 750A Guide to Sales Tax in New York State.

Multiple locations  

You must have a Certificate of Authority for each business location. You can choose to file one sales tax return for combined sales at all locations or a separate return for each location.

If you plan to operate your business locations as separate business entities, you need to file an application for a separate Certificate of Authority for each location.

If you will have multiple locations, and you plan to operate them as one business, you can register all the locations using New York Business Express. We will process your application and send you a Certificate of Authority for each location, all containing the same sales tax identification number.

If you are already a registered vendor and you are going to open an additional location, you can choose to combine your sales information and file a consolidated return. When adding a new location, you need to provide your current sales tax identification number along with the address of your additional location.

If you used New York Business Express to apply for your Certificate of Authority, you should also use it to register an additional location. Alternatively, you can send a letter or Form DTF-17-ATTSchedule of Business Locations for a Consolidated Filer, containing the information to:


If you prefer, you can call us at the Sales Tax Information Center.

You must wait to receive your Certificate of Authority before you can begin business at the new location.

Duplicate Certificate of Authority

If you are already registered for sales tax with the Tax Department but need a duplicate copy of your Certificate of Authority because the original was misplaced or destroyed, you can call us at (518) 485-2889.

New Certificate of Authority needed for transfer of ownership and organizational changes

Certificate of Authority cannot be transferred or assigned. If you are buying an existing business, or taking over the ownership of a family business, you must apply for your own Certificate of Authority. You cannot use the Certificate of Authority that we issued to the previous owner.

You must also apply for a new Certificate of Authority if you are changing the organizational structure (legal form) of your business, such as switching from a sole proprietorship to a corporation. The new business must have its own Certificate of Authority before it begins business.

You must display your Certificate of Authority

You must prominently display your Certificate of Authority at your place of business, including additional locations. If you have no permanent physical location, you can attach it to your truck, cart, wagon, stand, or other vehicle or facility from which you conduct business. You may be subject to a $50 penalty if you fail to properly display your Certificate of Authority.

You must file sales tax returns

Once you receive your Certificate of Authority, you are considered to be in business for sales tax purposes even if you never make a sale or never open the doors of your establishment. Therefore, it is very important that you file your sales tax returns on time, even if you have no taxable sales. There are penalties for late filing even if you owe no tax. You can file your sales tax returns online using the Tax Department’s Online Services, located on our website. To learn more about the filing requirements, see Tax Bulletin Filing Requirements for Sales and Use Tax Returns (TB-ST-275).

Penalties for failing to register for sales tax

If you are required to register for sales tax purposes but fail to do so and you operate a business without a valid Certificate of Authority, you will be subject to a penalty. The maximum penalty for operating a business without a valid Certificate of Authority is $10,000, imposed at the rate of up to $500 for the first day business is conducted without a valid Certificate of Authority, plus up to $200 per day for each day after. For more information, see Tax Bulletin Sales and Use Tax Penalties (TB-ST-805).

Other business permits 

Many types of businesses need permits and licenses from other state and local agencies in addition to a New York State Certificate of Authority. For example, a restaurant may need a liquor license issued by the State Liquor Authority to serve alcoholic beverages, while an automotive repair shop may need special permits from the Department of Environmental Conservation for the disposal of oil and other pollutants. New York Business Express can assist you in determining if your particular type of business will need any additional licenses or permits.

In addition, your business will have additional responsibilities and obligations beyond the collection of sales tax. Publication 20New York State Tax Guide for New Businesses, provides information on New York State rules for corporation taxes, withholding taxes for employees, workers compensation benefits, and much more.  

Note: A Tax Bulletin is an informational document designed to provide general guidance in simplified language on a topic of interest to taxpayers. It is accurate as of the date issued. However, taxpayers should be aware that subsequent changes in the Tax Law or its interpretation may affect the accuracy of a Tax Bulletin. The information provided in this document does not cover every situation and is not intended to replace the law or change its meaning.

S Corp Tax Election Forms

Looking to make the S-Corporation election ? You’ll need to file two forms, one with the State and the other with the IRS:

For details, see Tax and Payments in the Instructions for Form 1120-S, U.S. Income Tax Return for an S Corporation.

How to make or terminate the New York S election

To make the New York S election, file Form CT-6, Election by a Federal S Corporation to be Treated As a New York S Corporation.

To terminate the New York S election, file Form CT-6.1, Termination of Election to be Treated As a New York S Corporation.

Business Contracts for Startups

I have spent the past 20 (15 years in the legal industry) years drafting, reviewing and negotiating contracts in and for a variety of industries from entertainment, food and hospitality, fashion, construction, telecommunications, medical, amongst others.

Negotiating businesses contracts for business of all sizes is quite frankly my passion. I have read many books on negotiating contracts, have represented hundreds of clients on contract matters (including contract disputes) and have had the great pleasure of teaching classes about the ins and outs of contracts.

The fact is, businesses are governed by relationships: relationships between the owners/partners, relationship between the business and its customers, and the relationship between the business and its employees/contractors.

The point of a contract is to memorialize and manage people expectations in those relationships, limit liability, create mechanisms for resolving disputes, and establishing a fair and reasonable dynamic under the specific circumstances. One size rarely if every fits all. Every business is different and every relationship is unique to a degree. I take these philosophies into account whenever drafting any of the following contracts for my clients:

  • Employment Contracts
  • Website Terms and Conditions
  • Website Privacy Policy
  • Service Contracts
  • Consulting Agreement
  • Independent Contractor Agreements
  • Non Disclosure AgreementsLoan Agreements
  • Construction ContractsBroker Agreements
  • Stock and Asset Purchase Agreements
  • Purchase and Sale Agreements
  • LLC Operating Agreements
  • Partnership Contracts
  • Shareholder Contracts
  • Promissory Notes
  • Corporate Agreements
  • Sub-contractor Agreements
  • Real Estate Contracts and Leases
  • I have spent the better part of my career bringing to the table my experience as a seasoned litigator in order to protect and further my client’s interests but also to provide sound and reasonable advice in order to further the potential business relationship. The last thing anyone wants in a lawyer is an overzealous deal killer.

    Contact me for a free consultation.

    Trademark Classes Explanation for Startups

    Product (“Goods”) Classes

    Class 1: Chemical Products
    Chemicals used in industry, science and photography, as well as in agriculture, horticulture and forestry; unprocessed artificial resins; unprocessed plastics; manures; fire extinguishing compositions; tempering and soldering preparations; chemical substances for preserving foodstuffs; tanning substances; adhesives used in industry.

    Class 2: Paint Products
    Paints, varnishes, lacquers; preservatives against rust and against deterioration of wood; colorants; mordants; raw natural resins; metals in foil and powder form for painters, decorators, printers and artists.

    Class 3: Cosmetics and Cleaning Products
    Bleaching preparations and other substances for laundry use; cleaning, polishing, scouring and abrasive preparations; soaps; perfumery, essential oils, cosmetics, hair lotions; dentifrices.

    Class 4: Lubricant and Fuel Products
    Industrial oils and greases; lubricants; dust absorbing, wetting and binding compositions; fuels (including motor spirit) and illuminants; candles and wicks for lighting.

    Class 5: Pharmaceutical Products
    Pharmaceutical and veterinary preparations; sanitary preparations for medical purposes; dietetic substances adapted for medical use, food for babies; plasters, materials for dressings; material for stopping teeth, dental wax; disinfectants; preparations for destroying vermin; fungicides, herbicides.

    Class 6: Metal Products
    Common metals and their alloys; metal building materials; transportable buildings of metal; materials of metal for railway tracks; nonelectric cables and wires of common metal; ironmongery, small items of metal hardware; pipes and tubes of metal; safes; goods of common metal not included in other classes; ores.

    Class 7: Machinery Products
    Machines and machine tools; motors and engines (except for land vehicles); machine coupling and transmission components (except for land vehicles); agricultural implements other than hand-operated; incubators for eggs.

    Class 8: Hand Tool Products
    Hand tools and implements (hand-operated); cutlery; side arms; razors.

    Class 9: Computer and Software Products and Electrical and Scientific Products
    Scientific, nautical, surveying, photographic, cinematographic, optical, weighing, measuring, signalling, checking (supervision), life-saving and teaching apparatus and instruments; apparatus and instruments for conducting, switching, transforming, accumulating, regulating or controlling electricity; apparatus for recording, transmission or reproduction of sound or images; magnetic data carriers, recording discs; automatic vending machines and mechanisms for coin operated apparatus; cash registers, calculating machines, data processing equipment and computers; fire extinguishing apparatus.

    Class 10: Medical Instrument Products
    Surgical, medical, dental, and veterinary apparatus and instruments, artificial limbs, eyes, and teeth; orthopedic articles; suture materials.

    Class 11: Environmental Control Instrument Products (lighting, heating, cooling, cooking)
    Apparatus for lighting, heating, steam generating, cooking, refrigerating, drying, ventilating, water supply, and sanitary purposes.

    Class 12: Vehicles and Products for locomotion by land, air or water
    Vehicles; apparatus for locomotion by land, air, or water.

    Class 13: Firearm Products
    Firearms; ammunition and projectiles; explosives; fireworks.

    Class 14: Jewelry Products
    Precious metals and their alloys and goods in precious metals or coated therewith, not included in other classes; jewelry, precious stones; horological and chronometric instruments.

    Class 15: Musical Instrument Products
    Musical instruments

    Class 16: Paper and Printed Material Products
    Paper, cardboard and goods made from these materials, not included in other classes; printed matter; bookbinding material; photographs; stationery; adhesives for stationery or household purposes; artists’ materials; paint brushes; typewriters and office requisites (except furniture); instructional and teaching material (except apparatus); plastic materials for packaging (not included in other classes); printers’ type; printing blocks.

    Class 17: Rubber Products
    Rubber, gutta-percha, gum, asbestos, mica and goods made from these materials and not included in other classes; plastics in extruded form for use in manufacture; packing, stopping and insulating materials; flexible pipes, not of metal.

    Class 18: Leather Products (not including clothing)
    Leather and imitations of leather, and goods made of these materials and not included in other classes; animal skins, hides; trunks and traveling bags; umbrellas, parasols and walking sticks; whips, harness and saddlery.

    Class 19: Non-Metallic Building Material Products
    Building materials (non-metallic); nonmetallic rigid pipes for building; asphalt, pitch and bitumen; nonmetallic transportable buildings; monuments, not of metal.

    Class 20: Furniture Products
    Furniture, mirrors, picture frames; goods (not included in other classes) of wood, cork, reed, cane, wicker, horn, bone, ivory, whalebone, shell, amber, mother-of-pearl, meerschaum and substitutes for all these materials, or of plastics.

    Class 21: Houseware and Glass Products
    Household or kitchen utensils and containers; combs and sponges; brushes (except paint brushes); brush-making materials; articles for cleaning purposes; steel-wool; unworked or semi-worked glass (except glass used in building); glassware, porcelain and earthenware not included in other classes.

    Class 22: Ropes, Cordage and Fiber Products
    opes, string, nets, tents, awnings, tarpaulins, sails, sacks and bags (not included in other classes); padding and stuffing materials (except of rubber or plastics); raw fibrous textile materials.

    Class 23: Yarns and Threads
    Yarns and threads, for textile use.

    Class 24: Fabrics and Textile Products
    Textiles and textile goods, not included in other classes; beds and table covers.

    Class 25: Clothing and Apparel Products
    Clothing, footwear, headgear.

    Class 26: Lace, Ribbons, Embroidery and Fancy Goods
    Lace and embroidery, ribbons and braid; buttons, hooks and eyes, pins and needles; artificial flowers.

    Class 27: Floor Covering Products
    Carpets, rugs, mats and matting, linoleum and other materials for covering existing floors; wall hangings (non-textile).

    Class 28: Toys and Sporting Goods Products
    Games and playthings; gymnastic and sporting articles not included in other classes; decorations for Christmas trees.

    Class 29: Meat and Processed Food Products
    Meat, fish, poultry and game; meat extracts; preserved, frozen, dried and cooked fruits and vegetables; jellies, jams, compotes; eggs, milk and milk products; edible oils and fats.

    Class 30: Staple Food Products
    Coffee, tea, cocoa, sugar, rice, tapioca, sago, artificial coffee; flour and preparations made from cereals, bread, pastry and confectionery, ices; honey, treacle; yeast, baking powder; salt, mustard; vinegar, sauces (condiments); spices; ice.

    Class 31: Natural Agricultural Products
    Agricultural, horticultural and forestry products and grains not included in other classes; live animals; fresh fruits and vegetables; seeds, natural plants and flowers; foodstuffs for animals; malt.

    Class 32: Light Beverage Products
    Beers; mineral and aerated waters and other nonalcoholic drinks; fruit drinks and fruit juices; syrups and other preparations for making beverages.

    Class 33: Wines and Spirits (not including beers)
    Alcoholic beverages (except beers).

    Class 34: Smoker’s Products
    Tobacco; smokers’ articles; matches.

    Service Classes

    Class 35: Advertising, Business and Retail Services
    Advertising; business management; business administration; office functions.

    Class 36: Insurance and Financial Services
    Insurance; financial affairs; monetary affairs; real estate affairs.

    Class 37: Construction and Repair Services
    Building construction; repair; installation services.

    Class 38: Communication Services
    Services allowing people to communicate with another by a sensory means.

    Class 39: Transportation and Storage Services
    Transport; packaging and storage of goods; travel arrangement

    Class 40: Treatment and Processing of Materials Services
    Treatment of materials.

    Class 41: Education and Entertainment Services
    Education; providing of training; entertainment; sporting and cultural activities.

    Class 42: Computer and Software Services and Scientific Services
    Scientific and technological services and research and design relating thereto; industrial analysis and research services; design and development of computer hardware and software.

    Class 43: Restaurant and Hotel Services
    Services for providing food and drink; temporary accommodations.

    Class 44: Medical and Beauty Services and Agricultural Services
    Medical services; veterinary services; hygienic and beauty care for human beings or animals; agriculture, horticulture and forestry services.

    Class 45: Personal, Legal and Social Services
    Legal services; security services for the protection of property and individuals; personal and social services rendered by others to meet the needs of individuals.

    FAQs: The Trademark Attorney Process

    The process of preparing and filing your trademark application includes researching the proposed trademark, preparing the application, filing the application, and responding to “office actions” from the United States Patent and Trademark Office (USPTO).

    • $350 per class of goods/services (click here for a list of classes)
    • $300 – $400 for the clearance search/conflicts search
    • If a “Statement of Use” is filed separate from initial application: add $200

    Trademark Prosecution and TTAB

    • Prosecution is the period of back and forth with the USPTO, fighting to get the application approved, and docketing and responding to office actions.
    • For applications without serious objection, the back and forth is minimal. This is the outcome in most applications that use unique, non-descriptive names (e.g. KODAK)
    • If the examiner digs in on a rejection, and we want to fight for it, we may have to appeal to the TTAB.  This is rare.
    • Other parties can oppose your mark, this starts a mini-litigation before the USPTO Trademark Trials and Appeals Board (TTAB) over whether you should get a registration.  This is rare.

    It is important for clients to know that, at the end of the day, while preparing and filing the trademark application is a predictable task that we can do a fixed fee on, the later prosecution of that application is more like litigation – its an adversarial process between us and the USPTO.  We can be pretty confident which ones will be objected to, but it is really hard to predict with any accuracy more than that.  

    This is why it is best for clients to pick names that are unique and non-descriptive.  E.g. consider “KODAK” for cameras.  KODAK is a made up word that has no meaning in any language, it is unique and non-descriptive, you could use it as a trademark on anything.  

    USPTO Trademark Process:

    After the application is submitted, within 3-6 months the USPTO will issue a response. Commonly, the USPTO will issue an Office Action to discuss any substantive or procedural issues with the application/mark. A response is due within 6 months. The USPTO will then approve/deny the registration. If approved, the registration will be published for public opposition. Once the opposition period ends, a registration certificate will be issued based on use. 

    If application was filed with a statement of use, the mark will receive registration status.  If the application was filed based on the intention of use, a statement of use need to be filed within 6 months. 

    Registration updates are required between the 5th and 6th year (§8 or §8 & §15) and again between the 9th and 10th years (§8 & §9) to remain active.

    You should allow for 12-18 months for the full registration process. Occasionally, a quicker turnaround can be warranted.

    USPTO Filing Fees:

    $350 per class, per mark. However, no additional fees are required during the normal processing, including Office Actions.

    Statements of Use, if not filed with the application, are $100. Amendments and extensions range from $100-125.

    USPTO Renewal Fees:

    §8: $125 per class, per mark.

    §9: $300 per class, per mark.

    §15: $200 per class, per mark.

    USPTO accepts payment by Credit Card, USPTO Deposit Account, Electronic Funds Transfer.  Fees are paid independently. USPTO fees listed for electronic filing and are subject to change.

    Partnership Guide: 40 Questions for Any Partnership Agreement

    A Guide to Putting Together Your Partnership Agreement

    By Jeffrey K. Davis, Esq.


    The following is a 40-point checklist that you should use when drafting a business partnership agreement. This is not an all-inclusive list but I have to say, it’s pretty close and has broad applications for many industries. The purpose is to get you thinking about your rights, your expectations and the process of running a company with someone else. This list addresses issues such as management, profits/losses, distributions, capital contributions, dispute resolution, expectations of the parties, death/disability/divorce of the parties and other insightful questions. Use this as a guide, as a conversation starter, as a template for a well-vetted and successful partnership.

    1. Who will be involved in the day to day activities?
    2. Who will manage this company at a high-level?
    3. Who or how will the money be managed?
    4. How will decisions be made? For example, majority vote, unanimous vote, etc.
    5. What are critical decisions for you that require your approval?
    6. How will decisions be made with respect to acquiring property, personal property, real property, intellectual property, inventory, etc.?
    7. How will decisions be made with respect to selling or purchasing assets?
    8. How will decisions be made with respect to hiring, firing and disciplining employees, consultants, vendors, legal counsel, accountant, etc.?
    9. How will decisions be made with respect to the purchase of life insurance, liability insurance, disability insurance, general liability insurance and other insurances?
    10. How will decisions be made with respect to opening and maintaining bank accounts, borrowing money, lending money, bookkeeping, accounting, fundraising, or adopting a annual budget?
    11. How will decisions be made with respect to instituting, prosecuting and defending legal, administrative or other suits or proceedings in the Company’s name?
    12. How will decisions be made with respect to establishing pensions, and incentive plans for any or all current or former owners, Managers, employees, and/or agents of the Company?
    13. How will decisions be made with respect to fixing salaries for any member, manager, officer, director, etc.?
    14. How will decisions be made with respect to, contract management, debt collection practices, or receivables due to the Company?
    15. How will decisions be made with respect to Taking on new members/shareholders/owners
    16. Have you had a discussion with your business partner about the financial needs of the company?
    17. What are the financial needs of the company to stay afloat, and for how long?
    18. What is the company’s overhead?
    19. What do you need to break even?
    20. What will you need in order to keep the business afloat for 3 -6 months such as in the case of a global pandemic?
    21. Will you as business partners be contributing or lending money to the company?
    22. What sources of funding have you considered, such as loans vs. investors?
    23. What are your financial goals or expectations of the first 6 months? Year? 5 years?
    24. Will the company make any distributions or declare dividends? If so, under what circumstances? How often?
    25. What if there is an important decision that needs to be made and the owners are at a deadlock?
    26. How will you resolve disputes quickly and at minimal expense? NOTE: 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 or mediation. Another might be to vest the final tie breaking decision in a trusted advisor.
    27. Will you or your business partner be receiving a salary?
    28. Will you or your business partner be receiving any other form of compensation?
    29. Will you or your business partner be involved in the management of the company?
    30. Will you or your business partner be employed by the company ? What are your expectations with respect to being employed by the company? For example: for a set number of years, set salary, set job title, etc.?
    31. Will you or your business partner be required to devote a set number of hours per week/month to the Company?
    32. Will you or your business partner be expected to spend a minimal amount of time in the company office?
    33. Will you or your business partner be required to devote minimal number of hours per week/month to the company and its activities?
    34. Will you or your business partner be able to engage in competing or other businesses?
    35. Will you or your business partner be able to engage in other non-competing businesses?
    36. What happens if one of the principals of the partnership dies? NOTE: Usually this is handled by a buy-sell clause/contract that is funded with a life insurance policy.
    37. What happens if any of the partners becomes financially insolvent and declares a bankruptcy, will you have to take on that partner’s creditors as your new partners?
    38. How will you protect the company from the debt’s of one of the business owners?
    39. Let’s say you’re a partner with Sally. But she and her husband Jim get a divorce and in the settlement Jim gets half of Sally’s interest in your partnership. Do you really want to be forced to take Jim into your partnership? How will you handle this situation?
    40. What happens if one of the partners is hurt and is no longer able to contribute their time and talent to the partnership, how will this effect their ownership interest and the way profits are split? NOTE: Disability in my view is worse than death. You’ve lost your ability to make an income, it can be burdensome on your family (emotionally and financially), so if you’re business is centered around you, then why not consider something like disability insurance? And if that makes sense to you (which it should) then why not figure out how to have the business pay for it as a potentially deductible expense?

    Partnership Guide: Evaluating Your Potential Business Partner

    Over the years I’ve represented hundreds of startups, joint ventures and partnerships. I’ve even been a part of a few partnerships myself and had I put myself through the same 42-part test below perhaps some of those relationships would not have ended so miserably. People rush into business relationships all too often because we’re human beings and as much as we may want otherwise, we’re emotional by our very nature. It is one our greatest strengths but also greatest weaknesses. We put aside logic and reason for validation.

    If you’re thinking about bringing in a partner, collaborating with another business on a project, or going into business with a long-time friend, I urge, no I beg you to go through the list below when you’re formalizing your strategic relationship.

    There’s a saying that summarizes this best: “sometimes it’s better to leave them at the alter rather than suffer a messy divorce”. The point of this is to think things through and in doing so taking a more calculated approach to the best extent that you can.

    I.         VALUES: All business planning, whether it’s your own business or a shared business starts with determining your core values. These core values can be a mix between personal and business (as they tend to overlap). These core values are the heart, root, and foundation of your business. To help you visualize this better, think of a mission statement as a recitation and memorialization of your core values. Now place that mission statement in the middle of a white board (often referred to as a vision board). The mission statement is the heart of your business. It is placed in the center. From the heart-center you have branches that connect to different goals, and hanging below each of those goals is the process for achieving your goals. Everything centers and revolves around your mission statement because it consists of your values i.e. what matters to you most as part of the vision for your business, for your life, and for your customers. Now, when visualizing this vision board, focusing on that heart-center, ask yourself the following about your potential business partner:

    1. Do you share similar values?
    2. Will you both fundamentally be moving in the same directions?
    3. Do you both want the same or complimentary things? Not everything has to be identical and sometimes that is a good thing. The goals and process are things that may change and adapt through the course of your business lifecycle. That’s quite common. The core of what your business is about, it’s values, are more akin to a constitution, like the constitution of the United States. That constitution doesn’t change and should ring true for both you and your potential business partner.
    4. What things do you want that might be at cross-purposes with each other?
    5. Where do you want to be? What do you envision for your business in a broad sense?
    6. What do you feel about the vision for your future?
    7. What are the principles and values that are important to you and for your business?
    8. What is the “greater purpose” for your business?
    9. How are you going to be different than the rest?

    II.        CONFLICT: Dealing with conflict in your business is something that most business owners overlook. I’ve come across some incredibly brilliant business owners starting out, ready to take on the world, and in their zeal they didn’t take the time to consider how conflict is inevitable in all relationships in your business. The source of conflict is at minimal three-fold: partners, clients, and people that work for you. How people handle conflict will drastically effect your ability to function and could impact the culture of your business overall. Conflict between business partners can bring a business to a halt. If your business partner does not have the wherewithal to productively and efficiently address conflict in your business, it can effect the management of the employees and the level of necessary customer service. Conflict is inevitable because relationships are complicated and emotional. Conflict is the result of expectations not being met and the failure to communicate and document those expectations. With that in mind, think of the following:

    1. How does your prospective partner deal with conflict?
    2. Is your partner’s approach to conflict a match for your style?
    3. How does your prospective business partner communicate with you or others?
    4. How does your prospective business partner treat others that perform services for him/her?
    5. In times of stress will your prospective business partner stay the course or cut and run?
    6. How have they dealt with conflict in their past personal and business relationships?
    7. What happens if you and your partner reach an impasse, an irreconcilable difference on a fundamentally important issue? How will you handle it?

    III. WORK ETHIC: I represented someone who fought with her sister over their business of 20 years. One of the key aspects to the dispute was that the opposition claimed my client quit because she “gave up on the business” by not showing up at the office. For many reasons they were wrong which is why we ended up being successful in the lawsuit and forcing the other side into agreeing to a substantial (well above market) buy out. However, it raised a lot of questions over whether one’s work ethic has consequences for their ownership in the business. If the attorneys who drafted the shareholder agreement were more clear on that point then perhaps we would have lost. Regardless of win or lose, those types of expectations should be addressed before you start the business (and preferably in writing) because they are absolutely a source of tremendous conflict down the line if expectations are not met. With that in mind consider the following:

    1. What type of hours will this person work?
    2. How much work will they put into those hours?
    3. How effective are they at what they do?
    4. What is their work style and can you live with it?
    5. What are your expectations for each other in terms of time devoted to the business?
    6. Where will people be working from? (e.g. an office, home, both?)
    7. How will you be accountable to each other and the business? In other words, how will you  measure and keep track of your business partner’s work efforts?
    8. What metrics will be used to measure the efficacy of your business partner’s contributions?

    IV. INTEGRITY: Integrity is something that is often overlooked but critical for the survival of a clean and healthy business relationship. Integrity is the root of trust. If we’re being technical we’re talking about the quality of being honest and having strong moral principles; moral uprightness. It’s about the practice of being honest and showing a consistent and uncompromising adherence to strong moral and ethical principles and values. It’s about consistency. With that in mind consider the following:

    1. Do you trust this person?
    2. Is that trust based on real data or an emotional connection?
    3. How has this person behaved in their past?
    4. Does this person consistently meet their commitments, big or small?
    5. Will this person do what’s right, especially when it isn’t convenient or profitable?
    6. How does this person act when others are not present?
    7. How does this person speak about others when they are not present?
    8. Does this person follow through on their promises?
    9. How transparent is this person in their responses, access to information, and personal/business dealings?

    V. THE ADD-VALUE: Determining the add-value is a more practical line of questioning. You’re trying to determinewhat you and your business partner bring to the table and if those are valid reasons for entering into this potential partnership. You’re trying to understand what about this potential relationship will make your business venture successful and profitable. You’re trying to understand how this person will work with you to realize your end goals. Your answers or motivations should not be just about money. In addition, if your responses to these questions are motivated because of fear, then you should reconsider the partnership altogether. With that in mind consider the following:

    1. 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?
    2. How do you complement each other?
    3. How do you and your business partner make for a stronger foundation for your business?
    4. Do you share a similar vision?
    5. Have you been able to discuss short term and long term goals?
    6. Is your business partner bringing something to the table that is more than just money?

    VI. RELIABILITY. It’s a simple question really. Can you rely on this person? Is this the type of person you have to lie to in order to get them to meet you on time for dinner? If so, they’re not so reliable, and you may want to re-consider getting into a sophisticated business relationship with them that involves having to rely on their actions and ability to execute time sensitive decisions.

    1. Do they or will they come through as promised?

    The foregoing is meant as a guide. It’s not a bible, it’s not law, it’s not set in stone. It’s nothing more than a thought provoking guide that I trust you’ll use as the baseline for considering a business partnership.