Starting a business can be a very daunting task on your own. There are many moving parts that must be dealt with, sometimes at breakneck speed. There is only one of you and you cannot cover all of the bases yourself, no matter how hard you try. You may not possess the right skill set required to do certain functions well. Some people cannot handle stress well, or are too emotional in their decision-making. There is the need for creative. There is the need for discipline. Then there is the need for capital. Partnerships can help to address all of those concerns.
A partnership is not just a group of individuals getting together and operating a business hoping for profit. A partnership is a legal business structure where there is a sharing of monies, duties, and responsibilities to perform. There is the voluntary contribution of capital and the concomitant acquisition of equity in the enterprise. Different people bring different skills, experiences, expertise, assets, and opportunities to the table. Everyone does not have to just bring money… although that helps a lot.
There are different types of partnerships. The most common are: General, Limited, Limited Liability. Notice that I omitted “Silent”. That is because there is no such thing as a silent parent. It is a myth, a nice idea … until the “#@*% hits the fan!” The “silent” partner will no longer be silent when there is a major loss or a major gain.
The general partner is the partner with the most responsibility for the success of the business/venture. This partner has unlimited legal responsibility for everything that goes right… or wrong… in the business. This partner MUST issue periodic financial reports to the other types of partners AND give them periodic access to review the bookkeeping records of the business. Sometimes there are several general partners in a group. The duties and responsibilities of a general partner should be written and clearly delineated from the duties of other types of partners. Profits received by the general partner are subject to self-employment taxes.
The limited partner is the partner responsible for ONLY his/her narrowly defined duties within the organization but has no operating authority within the organization. There must be at least one general partner and at least one limited partner. Some limited partners are only good for business development, or technology development, or other specialized knowledge that they bring to the table. Understand that limited partners can only get paid AFTER the general partner(s) get paid. The profits paid to limited partners are not subject to self-employment taxes, but are subject to general income taxes.
The limited liability partner is the partner that puts up the money only, and agrees to have a say in the daily operations of the business. There is no general partner. The limited liability partner’s liability for whatever goes wrong is limited to the amount of the partner’s financial investment. All partners share limited liability from the obligations of the venture, including malpractice lawsuits as a result of another partner’s professional acts or non-performance. Limited liability partners get paid as per their equity ownership in the project, and those payments are subject to self-employment taxes.
Regardless of which form of partnership you choose to engage in, remember to choose your partner(s) wisely. Character counts. If the person has a history of not following through on commitments, not listening carefully, being irrational, or being argumentative, then that person really should not be your partner. Be VERY clear with your partner as to what your contribution(s) to the partnership will be and when the contributions to – and distributions from- the partnership will occur. Make sure you know exactly what your partner expects of you. Be very clear on what the partnership exit strategy is for you and when that can occur and under what terms and conditions.
Know the exact nature of the business of the partnership that you are entering into. One cannot be all things to all people. Ask what is the primary product or service that the business will make money from. Get a SIC (Standard Industrial Classification) or NAICS (North American Industrial Classification System) number on the business so that you can examine its financial performance to others competitors within the same industry to make determine if your company is competitive or being mismanaged. Know the central location where all financial records are being kept.
Remember: There is no partnership unless it is in writing! Verbal understandings and being friends does not count. Know your start date. Know what your contributions are to the partnership. Know what your equity stake in the partnership. Ask how much equity other investors have in the partnership. Make sure your equity is commensurate with your contributions to the project. EVERYTHING is in writing, so be careful what you say.
Lastly, remember the words of a major private investor, “A dollar makes a better partner than a partner!”
For futher guidance on how to structure your business project or how to decide if you should become a partner in someone’s business venture, give Empire Capital & Consulting Corp. a call at 267-581-5993 today.
