Have you ever dreamed of having your own small business? My dream was actually to become a minority partner in an existing company with the idea that someday I could buy a larger share. Then, when I hit 50, my employer went out of business. I couldn't find another sales management job so I decided to start up my own small business selling computer and printer maintenance like I had been doing previously.
Because my background was sales and marketing, not printer repair, I wanted a partner who had expertise in the technical end of the business. A skilled technician I knew referred me to his friend, 'Tim.'
Saved from a Disastrous Partnership Agreement
I got lucky when 'Tim' refused to come in as a partner in my startup. He wanted to stay independent so I hired him as a subcontractor. During the next several years, I discovered what a horrible partner he would have been. 'Tim' proved to be unreliable. We couldn't trust his time commitments. One time he finally arrived a couple days later. At least his repairs were good.
Considerations about Ownership and Business Structure
- Partnership financial liability and legal responsibilities
- Only 100% of a company to divide up
- Alternative to legal ownership
- Exit strategy
- Partnership agreement
Partnership Financial Liability and Legal Responsibilities
A small business partnership has certain legal responsibilities and liabilities. Partners can commit the company to purchases and contracts. Likewise, if the business fails, your personal assets are at risk.
See an attorney or CPA for advice on the best legal structure for your needs and on the risks of each business form.
Only 100% of a Company to Divide Up
As you grow, two things will happen:
- You will need expensive, highly skilled people
- You will need to raise more capital
Like other small business owners, you might choose to use a partnership interest in the company to get that talent without paying a higher-than-you-can-afford salary. Or you use it to get the money you need for a crisis or to buy equipment to take on a huge contract. Eventually you lose control of your company. Moreover, you are now liable for the actions of your partners.
Alternative to legal ownership
Instead of giving away a partnership to bring that skilled employee onboard, start with a profit sharing plan. You need a well-thought out plan to share the profits because you will eventually need other talented people who will want a portion of the profits too. Additionally, you may need to give up some ownership for the money to expand.
Be sure your profit sharing plan describes the way to calculate percentage of profits your employees earn, and what they have to do to earn it.
If you gave ownership, what happens when your partner decides to leave? Define in advance how you will calculate ownership value. Include how long you have to raise the money to make the buyout.
Before you have your attorney draw up a partnership agreement, think through what you want it to cover. List out the authority, responsibilities, and job description. Ask your attorney to include non-compete and non-disclosure policies. And cover your buyout options.
If you're thinking of starting up your own small business, you have doubtless thought about getting a partner, either to obtain skills you lack or money you need to get the business going. Think about these five points before committing yourself to a partner. You may be able to use a profit sharing plan instead of ownership. If you still choose to go ahead, use the other points to plan out your visit to your attorney. A little planning will provide peace of mind down the road - and protect your business.
- Partnership Agreement