Business owners & partners

[huckster]

For all of you biz owners out there with partners. Curious about what advice you would give someone walking into a business, part and equal parts owner with four other partners/owners.

Also, questions regarding structures. LLC vs Corp.?? Pros and Cons??

Four of the five partners have been in place for a while, so there is a track record for how well they get along and how well they work together. The fifth guy would be the new guy coming in.

Contracts--how legally binding? Any important clauses/advice??

Thanks!!

 

[T Bolen]

Re: BUSINESS OWNERS & PARTNERS

I have been in a part ownership relationship with my partner for 18 years. Corporation status, with each partner owning "x" percent of the shares. There needs to be an agreement in place outlining the compensation. For us, we both get a minimum "guarantee", and the bonus is based on contribution to the firm's profit by each partner. Contribution = income brought in by each partner, minus the cost of such business.The agreement should also cover an exit strategy, should any partner want out. Agree on how the shares are to be valued and a term for buyout if a partner leaves. Beware of non-compete agreements lumped in these agreements. As always, get a good lawyer to look over / write the agreement.
Remember, a partnership is a lot like a marriage. You have to rise above petty differences and constantly remember the big picture.

 

[lemansnsx]

Re: BUSINESS OWNERS & PARTNERS

Remember, a partnership is a lot like a marriage.

With that in mind let's not forget key man insurance. You do not want a partner's spouse involved in running the business if one of your partners should die and his shares pass to the wife. Make sure that all eventualities are covered for up front.

Last time I went through this one partner's wife walked in just as we were settling on the amount of the life insurance. Her ears pricked up when she heard "one million dollars" (this was almost 20 years ago) and she cheerily voiced the thought "gee, you mean my husband will be worth far more dead than alive...".

 

[Sig]

Re: BUSINESS OWNERS & PARTNERS

What type of business are we talking about? Ideal corporate structure and entity declarations differ widely depending on the type of bussiness being conducted.

In addition, what is the long-term vision for the company? This will also impact what entity you would consider declaring yourselves. For example, most companies that intend on 'going public' at some point usually declare and operate as a C corp. C corporations have several advantages over other corporation types, but are often too stringent with accounting/reporting requirements for some tastes.

With 5 partners, you will definately want a very tight and specific operating agreement in place. A small business attorney will have a ton of experience in this department. In addition, if you can get a referral to one that has worked with a similar business concept as your's, then he/she will be able to contribute quite a few things that you/your partners may not have thought about.

 

[len3.8]

Re: BUSINESS OWNERS & PARTNERS

With that in mind let's not forget key man insurance. You do not want a partner's spouse involved in running the business if one of your partners should die and his shares pass to the wife. Make sure that all eventualities are covered for up front.

Last time I went through this one partner's wife walked in just as we were settling on the amount of the life insurance. Her ears pricked up when she heard "one million dollars" (this was almost 20 years ago) and she cheerily voiced the thought "gee, you mean my husband will be worth far more dead than alive...".

Add protection from significant and insignificant others that may produce children to the mix.
Ask me how I know.... Not meant to be funny, because this was a major problem...

 

[Sig]

Re: BUSINESS OWNERS & PARTNERS

Add protection from significant and insignificant others that may produce children to the mix.
Ask me how I know.... Not meant to be funny, because this was a major problem...

I am attempting to add a similar clause to one of my operating agreements. Do you recall the scope and general wording needed to provide adequate protection?

 

[steveny]

Re: BUSINESS OWNERS & PARTNERS

Beware of non-compete agreements lumped in these agreements. As always, get a good lawyer to look over / write the agreement.
Remember, a partnership is a lot like a marriage. You have to rise above petty differences and constantly remember the big picture.

I always put non-compete clauses in my agreements. If the other party comes in and takes business away from me I need to have my back covered.

As for the marriage part, business partners are more like a loveless marriage. If you can go it alone and hire the help needed instead of taking on partners your profit will be much greater over the long term.

 

[len3.8]

Re: BUSINESS OWNERS & PARTNERS

I am attempting to add a similar clause to one of my operating agreements. Do you recall the scope and general wording needed to provide adequate protection?

Sig, I can try to get the correct input for you Monday. I don't want to mis-post at all. Also, in our Business's State of operation, She and the child still had a right for some type of compensation from the Business, Still trying to find out if even with documents signed by all parties of the partnership, that theinsignificant couldn't still recover..
Crazy stuff...

 

[GOTTSPD]

Re: BUSINESS OWNERS & PARTNERS

Hey guys. I'm a small business attorney in the DC area and this IS what I do for a living. With respect to the LLC/Corp. issue, I'd suggest that you talk with competent legal counsel AND a very good accountant (not just a tax preparer... someone who actually has the ability to give accounting counsel). Anyway, a couple of quick things to consider...

LLC -

Pros: any type of entity can be a member; very simple to set up and operate, similar tax benefits to a S corp.

Cons: since the 5 principals won't be employees, but instead will receive a guaranteed payment (in lieu of a salary), they won't be able to get the same tax benefits as a S Corp with regard to FICA.

Corporations (assuming a S election) -

Pros: Everyone (i.e., bankers, consultants, etc.) understands basic corporate structure in that a corp has officers, directors, and shareholders...; profits taxed only once (on each shareholders' k1).

Cons: S corps have shareholder eligibility requirements in that it can have no more than 75 shareholders, cannot have other entities as shareholders (generally)....

I almost never set up corporations without filing a Sub S election for them, even if they intend to go public later, they can elect S status now and "unelect" it in the future. Otherwise, as you may know, the profits will be double taxed, at both the corporate level and the individual level.

With regard to the preparation of a Buy-Sell, they are critical to successful business planning. The litigation department of my firm spends a good deal of their time addressing problems that have arisen from poorly drafted or thought out agreements.