Here
are some things to consider before you take on any partnership deal:
Obviously, only go into business with
those you trust. Vet everyone in your business dealings, whether it be a
contractor, a tenant, etc. This could mean conducting background checks and
calling personal references. This is especially true with your business
partner(s) and is by far the most important way to protect yourself when
entering a partnership.
Address potential issues before they
become issues. Talk about worst-case scenarios. If your partner isn't willing
to do so, for whatever reason, you have the wrong partner.
Read and understand your partnership
documents before you sign them. A good attorney can help you identify possible
issues and present solutions, but ultimately you and your business partner(s)
need to take ownership of the agreement and share a thorough understanding of
how it will govern your business.
Consider getting separate counsel if
using the same attorney as your partner(s) is presenting concerns.
If you live in a community property
state, have every business partner’s spouse sign the partnership/operating
agreement and any amendments. The spouse presumably has an ownership interest
in the business, and you want them to agree to the provisions of the
partnership/operating agreement. This is especially important regarding the
method of valuing the business when buying out a partner in the event of a
divorce.
Setting up the Partnership
Creating the partnership agreement and
setting up the proper entity/structure for the partnership are the two most
important steps in the partnership process. Understanding the mechanics of how
your business will be managed is the key to designing your partnership
agreement and documenting the terms. While the list of items to consider in a
solid partnership agreement is indefinable—every partnership is different—I've narrowed it down to my top ten:
1. Partner roles in signing
and authorizations. Have a very clear understanding
of what the managers or officers of the business are authorized to do on behalf
of the company.
2. Duties and
responsibilities of each partner. There should be a
description of each partner’s responsibilities and duties so each partner knows
what to expect from the other. Furthermore, there should be predetermined
consequences for partners not completing their duties.
3. Contributions of capital.
What amount of time, money, and assets is each
partner contributing to the partnership? This includes the initial
contributions as well as additional contributions that may be necessary to
continue operating the business in the future.
4. Rights to distributions, profits, compensation, and
losses. Any right of the partners to receive
discretionary or mandatory distributions, which includes a return of any or all
of their contributions, needs to be clearly and specifically set forth in the
partnership agreement.
5. Unanimous vote
requirements. Which events or decisions will
require a unanimous vote of the business partners? It’s crucial that you and
your business partners decide the procedure together from the outset.
6. Dissolution or exit
strategy. The partnership agreement should indicate
the events upon which the partnership is to be dissolved and its affairs wound
up. It’s possible the business concept and model don’t lend themselves to
answering this question. But, for example, in a real estate deal, it’s
important to have a timeline and possible triggering events that will lead to
either selling the property or buying out one of the partners if they don’t
want to stick around for the long haul.
7. A buy-sell provision or
separate buy-sell agreement. This type of agreement
addresses major changes in the partnership arrangement. For example, what if
one partner voluntarily or involuntarily leaves the partnership? How are they
bought out? What happens if you want to sell your ownership interest—should
your business partner have a right to buy it before you sell it to a third
party? What if your business partner dies? Or gets divorced? Or files for
bankruptcy? Or just wants to retire?
8. Expulsion provision. Carefully consider this provision, which is a
double-edged sword. The benefit of such a provision is that you can put in
writing when a partner can be forced out of the business. For example, you and
your partners could agree that if one partner isn’t pulling their weight, they
can be forced out. But be certain your well-deserved, three-week vacation to
Tahiti doesn’t trigger the expulsion clause.
9. Non-compete provision. For example, you and your business partner(s) may agree
that if one of the partners leaves the business, they cannot open a competing
business or work for a competing business within a certain number of miles and
for a certain period of time.
10. Miscellaneous provisions.
Some examples include a provision for attorney’s
fees for the non-breaching party if they win a lawsuit, a mediation or binding
arbitration clause so you don’t have to go to court if you don’t want to, or a
venue or choice of law provision on which state law would be applied in a
contract dispute and where the dispute would be litigated.
Make sure you sit down with your
partner(s) to discuss the best- and worst-case scenarios. Have a competent and
honest attorney represent the company or have each partner hire an attorney to
review the partnership documents and address the above issues, as well as the
individual and specific needs of your and your partners’ particular situation.
The Best Entity for a Partnership
In most cases, the best structure for a
partnership is the limited liability company (LLC). I realize there are unique
situations where a corporation or a limited partnership might make sense;
however, those are the exception and not the rule. In fact, if you need to save
taxes, it’s typical to have each member’s share of the LLC owned by an S
corporation.
There are three significant reasons why
the LLC is such a perfect entity for partnerships. Here's a brief summary:
1. Its limited liability protection
shields you from the acts of your partner (and vice versa). Without it, you
have unlimited vicarious liability.
2. The operating agreement and
corresponding initial minutes and formation documents are fantastic documents
to define all of the partnership terms.
3. The flexibility of the LLC is
beneficial for allocating profits, losses, and capital, as well as for allowing
individual partners to do their own tax planning after they receive their
allocated share of profit.
Partnership Management
After all the documentation's been
completed and you begin operating as a partnership, you should follow several
procedures for a successful venture.
Here are the top three habits that will help a partnership
succeed:
1. Communication and
documentation. As the business partnership
evolves, record and document anything that's contrary to your initial
partnership/operating agreement. A good partnership/operating agreement will
allow for revisions due to changing circumstances, but these should always be
in writing and signed by each business partner.
2. Be involved in your
business. Don’t ever think a partnership is a
turnkey operation. People who aren’t in constant communication with their
partners will soon find themselves on the outside and in a dispute. Clearly
understand your duties and responsibilities, and fulfil the expectations of
your partners or readdress what those expectations should be.
3. Bookkeeping and tax
deposits. Don’t cut corners on bookkeeping and
finances. This is the lifeblood of your business and will determine when and
how your profits are distributed. Making sure your tax deposits are made on
time and in the right amounts is also the backbone of good tax planning in your
partnership. Beware of “phantom income,” which is income from the partnership that
exists on paper but has no corresponding distributions. This can wreak havoc on
a partner’s individual tax return without proper bookkeeping and planning.
I would like to think that these
articles become an asset to anyone who is new to detailing and to
professional’s alike, as well as industry experts who seek to advance their
knowledge.
I hope the above article was
informative. By having some understanding of the ‘What’ and ‘Why’ as well as
the ‘How’ along with a little science to help you understand how the chemicals
we use react, you can achieve the results you desire.
I would appreciate it if you would share
this article as it helps other detailers further their knowledge.
Questions and/ or constructive comments
are always appreciated.
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