Some Talking Points for You and Your Prospective Business Partner

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.

FAQ’s: Forming a Corporation

 

The Process

To form a Corporation one files a Certificate of Incorporation with the Department of State.

The filing fee for filing the Articles or Organization is $125 plus a $25 expediting fee.

The firm’s legal fee to prepare and file the Articles of Organization is $150. This fee includes obtaining your new company’s tax identification number.

Estimated time for performance after being retained: 1-2 days.

Summary of Cost:

The total cost of filing the Certificate of Incorporation ($150) + obtaining the tax identification number (included) + the firm’s fee ($150) = $300 

Some Corporation Basics

Types of Corporations: A Corporation when formed is by default a C-Corporation. There are also Benefit Corporations, B-Corporations and S-Corporations, which might make the conversation a little confusing but here we simplify it for you:

  • A Benefit Corporation is a new type of legal entity that is committed to producing a public benefit for society and/or the environment.
  • A B-Corporation (not the same thing as a Benefit Corporation) is actually a certification that your corporation meets certain verified standards of social and environmental performance, public transparency, and legal accountability.
  • An S Corporation is a tax election, meaning you file a form with the IRS and the State to be treated as an S Corporation for tax purposes. This is discussed in a little more detail below, but all you need to know is an S Corporation is a C Corporation that seeks to be treated differently for tax purposes.

Limited Liability: All corporations offer limited liability for the shareholders, provided that the shareholders follow the statutory required corporate formalities such as holding annual meetings (where shareholders vote on the directors and the directors vote on the officers), entering into business contracts in the business’s name, not your name, and maintaining business bank accounts. The key is remembering that you as a shareholder are protected from personal liability for your corporation’s actions because your corporation is considered a separate entity from yourself and as such, you must maintain a formal separation from yourself and your company by engaging in corporate formalities, and maintaining separate bank accounts etc.

Taxation: C-Corporations are known for their double taxation scheme. So, income that a corporation receives is taxed twice: first when the corporation receives the income and then again when the money is disbursed to the shareholders either in the form of salary, distributions or dividends.

As mentioned previously, to become an S-Corporation is a tax election i.e. You file a form with the State Tax Department and with the IRS to “elect” to be treated as an S-Corporation. One of the key differences between a C-Corporation and an S-Corporation is the difference in how income is taxed. As per the IRS website: “S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income.” See https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations for more information on S Corporations, and the requirements.

Ownership: A corporation is owned by “shareholders”. Shareholders own shares of stock in the corporation. The corporation “issues” shares to individuals (or in some cases other companies) who then become shareholders. When you form your corporation, you can determine how many shares the corporation is authorized to issue. “Authorized” shares are the shares a company is authorized to issue, not the number of shares the company will necessarily issue. For example, you might authorize 10 million shares, but only issue 2 million. “Authorized but unissued shares” are shares that are authorized but not issued. If outstanding shares are less than authorized shares, the difference (unissued stock) is what the company retains in its treasury

Management:  A corporation is managed by its directors or board of directors. In most closely held corporations, shareholders and directors are generally one in the same.

  • Directors: Directors generally control the policy of the corporation, and the officers put that policy into effect.  A director may not delegate his or her authority.  A director may not give his or her proxy to vote at a meeting of the board of directors, for example.  A director may be removed only under specific and special procedures.
  • Officers: A corporate officer is basically a high-level management official of a corporation, hired by the board of directors of a corporation or the owner of a business. Common officer positions are: president, vice president, secretary, financial officer or chief executive officer (CEO). The officers of the corporation serve at the pleasure of the board of directors.  An officer, except as limited by the corporation and its enabling statutes, may delegate his or her responsibility and authority. Even though an officer may have an employment contract which provides him or her with rights to compensation, he or she may be removed from office at any time by the board of directors. 

Corporate Governance Documentation: There are various written instruments that a corporation uses to document the rights and duties of shareholders, directors, and officers. Bylaws are a detailed set of rules adopted by a corporation’s board of directors after the company has been incorporated. They specify the corporation’s internal management structure and how it will be run. Through the course of the corporations’ lifetime, both shareholders and directors will have meetings in order to vote on certain aspects of the corporation’s management. These meetings are documented in “meeting minutes” and the decisions made by the shareholders or directors will be set forth in a written “resolutions”.  Shareholders can also use other types of agreements in the management and planning of their business such as proxies, voting agreements, or buy-sell agreements. A buy-sell agreement basically sets forth the mechanism for buying out a shareholder’s stock in the corporation in the event of death or disability, generally speaking.  A sample buy sell agreement can be found in the appendix to this e-book.

Miscellaneous: There is no legal requirement that a corporate seal be used on any documents under state law, however many financial institutions require that you use your seal in connection with corporate resolutions, loan documents, notes, and the like.

 

FAQ’s: Forming an LLC

The Process:

To form an LLC one files Articles of Organization with the Department of State.

The filing fee for filing the Articles or Organization is $200 plus an optional $25 expediting fee.

The firm’s legal fee to prepare and file the Articles of Organization is $150. This fee includes obtaining your new company’s tax identification number.

In New York there is also a publication requirement. Section 206 of the New York State Limited Liability Company Law requires that within 120 days of its formation, a notice in two general-circulation newspapers (one daily, one weekly) in the county where the LLC was formed. The notice must run once a week for six weeks and include a number of facts concerning the company and its formation.

The newspapers must be designated by the county clerk of the county in which the office of the LLC is located, as stated in the articles of organization. After publication, the printer or publisher of each newspaper will provide you with an affidavit of publication.

A Certificate of Publication, with the affidavits of publication of the newspapers attached, must be submitted to the New York Department of State, Division of Corporations, One Commerce Plaza, 99 Washington Avenue, Albany, NY 12231. The fee for filing the Certificate of Publication is $50. This fee is included in the “NYS Publication fee” listed below.

Summary of Cost:

The total cost of filing the Articles of Organization ($200) + obtaining the tax identification number (included) + the firm’s fee ($150) + the NYS Publication Fee ($350) = 700

Estimated time for performance after being retained: 1-2 days except for the completion of NYS publication.