Are you thinking of going into a partnership? If so, I highly recommend you listen to this episode before you jump in. Are you currently in a partnership? This is the episode for you. I am passionate about protecting you and your partners! So listen all the way to through for some sound advice.
In this episode:
- Structure of the partnership
- Which entity should you choose
- What goes in the partnership agreement
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Episode 209: How to Structure a Partnership Transcript
Andrea: [00:00:03] Welcome to the Legalpreneur Podcast. I’m your host, Andrea Sager, founder and CEO of Legalpreneur, Inc. As a serial entrepreneur and someone that works exclusively with small business owners legally protecting their business, I’m dedicated to covering common legal issues faced by business owners, providing you with the business knowledge you need to catapult your businesses growth and showing you just how some of the world’s most elite entrepreneurs have handled these legal and business issues themselves in true attorney fashion. The information in this episode is not legal advice. This is for informational purposes only, and you should always consult with your attorney before implementing any of the information in the show. Hello there. Welcome back to another episode of the Legalpreneur podcast. Today we are talking about partnerships.
Andrea: [00:00:53] I know that at some point I’m sure you have considered going into business with another person, whether that be your significant other, a friend or just a business colleague. No matter what the situation is, you need to make sure you listen to this episode before you enter into any partnership. And if you’re already in a partnership, make sure you listen to this all the way through to ensure that you both or however many partners, whether it’s two, five, ten, you want to make sure that all partners are thoroughly, legally protected in this partnership. So what we’re going to cover is the structure of the partnership, what entity and what goes in the partnership agreement, because the partnership agreement, quite frankly, is the most important document within the partnership.
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Andrea: [00:02:33] So talking structure when it comes to the entity of a partnership, if more than one person is conducting business and two or more people that intend to have a partnership, then you have a general partnership. Now, like I say, you don’t want one, but as far as liability protection goes. You don’t want to just have a general partnership because if you don’t have some type of liability protection, whether it be a limited partnership or an LLC, then you are responsible for the acts of the partner, not just the debts of the company, but also the acts of your partner. You want to minimize that liability, which is why you want to probably have an LLC, which we all know is a limited liability company. A lot of people don’t realize that your partnership can be an LLC. It doesn’t just have to be a partnership. Now for a quick refresher, the LLC personally protects you from liability from the debts of the company, but it does not change your tax structure. So when you have a partnership and you decide to have an LLC, you also want to chat with an accountant to figure out the best tax structure because being taxed for a partnership, it can cause issues. So when I say you want to chat with an accountant, spend however much money just to have that conversation, because I’ve seen many partners get screwed because they didn’t realize the tax implications of having a partnership.
Andrea: [00:04:12] When you have a partnership, I mean there’s the slew of entities that you can have. There are limited partnerships. However, for the most part, you probably want an LLC if you’re not sure, chat with a lawyer, whether it’s me, a Legalpreneur attorney or any other attorney. You just want to chat with an attorney about the specifics of your business and what entity you should be. Generally speaking, an LLC is a lot of times the best option for partners. Not always the case, though. So you choose your entity, whether it’s an LLC, or maybe you do just decide to be a general partnership. What goes into the partnership agreement and when it comes? When we file an LLC for a partnership, the actual filing and everything like it’s the same. We don’t charge any different. However, what does cost money is the partnership agreement because this is the most important document in your partnership, because it governs how you are to operate. It governs how you split profits, split losses, the details of the relationship between each partner. So I’m not going to tell you exactly how you need to do these things, but I’m going to go over a lot of the important things that need to be covered in your partnership agreement because you want to make sure they’re always covered. And when it comes to a partnership agreement, this is one thing that I do believe. You want to spend money on an attorney to get done.
Andrea: [00:05:55] You know, you hear me preach all the time, “hey, you can DIY this it’s fine to DIY this, it’s figure out a deal”. And yes, a partnership agreement can be DIY. However, when it comes to two humans, you want to have at least a third party that is drafting this agreement for both parties because you there’s so many things that can be left out, so many things you’ll forget about and you may want to hear, Hey, what are the best practices for this certain thing? All of that is done with an attorney. So a partnership agreement, that is one thing that I do think you should spend money with an attorney to get done. So just a few things that are covered in the partnership agreement and we’ve drafted oh gosh, many partnership agreements there. I mean, some are just a few pages, some or 20 plus pages. So it’s it can be very, very thorough. And the more thorough, I think, the more protection there is for each business owner. But I get it doesn’t always have to be like that. So I just want to cover some of the important points that do need to be covered in a partnership agreement. So one of the things is you really need to figure out what is the objective of our business. Let’s say you want to co-create a course together. So you have this online course and. I guarantee, unless you both are extremely, extremely good communicators, I’m sure you both have a different idea of what’s going into this, so you need to really talk about who’s actually creating the course.
Andrea: [00:07:39] Are we both recording it? Is one of us going to draw out the course and only one of us records it? Who’s going to be responsible for marketing the course? Because I’ve seen partnerships where they do actually co-create whatever it is that they’re creating, but only one is actually marketing it and they’re the one bringing in all the money. And when it comes to the business objectives, one of the things obviously that goes into the partnership agreement is who owns the intellectual property created in this partnership? That’s a huge one. I’m always a huge proponent of being very, very clear on who owns the intellectual property in the arrangement. So when it comes to intellectual property for the partnership, you’ll want to. Figure out, hey, is this something that the business owns and we both get 50%? Does it do one of us own it and we license it to the other? However, which way you want to structure it, these are all things that you want to make sure are covered in the partnership agreement. Now, of course, one of the big things is percentage of ownership. Are we going to be 50, 50 partners? And I’ve seen this structured every which way. Maybe you just have somebody that’s a 1% owner or 49, 51, 5050. It’s completely up to you.
Andrea: [00:08:57] And these are all things that you probably I’m telling you, you want to talk directly, one on one with an attorney about these things. Dividing the profits and losses. This can be a bigger headache than people think about because you’re like, Oh, we have a profit one month, great. We get a distribution. But what if there’s a loss next month? Are you going to pay out profits every single month or are you going to wait quarterly to pay them out in case there’s a loss on one of those months? Or are you going to pay them out yearly? All of these things are things you need to think about when bringing on a partner. And I don’t say this to scare anybody. I just I’ve seen so many partnerships go sideways and. A lot of times they didn’t have to go sideways if there was a clear cut partnership agreement. It didn’t have to go that way. I’m going to just list these things out because I want to make sure that you all know what needs to be in a partnership agreement. Sometimes you want to clearly state the length of the partnership. Maybe this partnership is only going to be around for a year or only for the duration of this one project. If it’s going to be perpetual, then say it’s going to be ongoing until we decide to no longer be in business. Now, decision making and resolving disputes, that’s a huge one.
Andrea: [00:10:28] And you always want to draft this when things are gravy between all the partners. Because if one partner is unhappy or all partners are unhappy, it’s like it’s going to be a shit show drafting the agreement. Now another big thing is incapacity or death of a partner. What happens if they’re incapacitated for a period of time? Who takes their place? Is the other partner just going to. Make decisions for the other one, or is the partner’s incapacitated going to have another person step in their place to make decisions for them? What if one partner wants out? Can they just get out? No matter what do they have? Does the other party have to buy them out if there is a buyout? How do you determine the value of the company? Do you have to pay for a third party evaluation or do you want to go off of profits from the past year or two? There’s so many things that can go into a partnership agreement and like I said, I don’t say these things to scare you. I just want you to be aware of what goes into a partnership agreement, because I have seen so many people want to start a business together or start a project together and they’re like, Oh, things are great. We’re just going to split everything. But there’s so many little things that you have to think about when going into business with someone else. Now there’s a there’s a lot of other things that go into the partnership agreement.
Andrea: [00:11:55] Those are the main things. So I’ve had one partnership in my life. This this was the poker club that I owned, which I am recording from today and where I’ve been recording from the past month or two. I don’t own it anymore, but I work from here because they’re not open during the day. But my partner in that business, we had a very clear cut partnership agreement and yes, we had arguments, but it was never, never to the point where it’s like, well, let’s see what the partnership agreement said. And I honestly, I think part of that was because we knew everything is clear cut in this partnership agreement, and so we knew that we couldn’t screw one another over it. Not that it ever got to that point, but having that partnership agreement drafted out, it makes things. A lot more clear in the long run. So. I don’t care if it’s your best friend of 30 years or you’re whoever it is, always have a partnership agreement in place when you are doing business with more than one other person. If you need help, if you have any questions, feel free to reach out. Shoot us an email. We can always help with these things, but please, please, please do me a favor. If you have a partner, if you are thinking about going into business with another person. Always, always use a partnership agreement. All right, you guys.
Andrea: [00:13:19] I will see you next time. Here at Legalpreneur, we’re committed to providing a supportive legal community for all business owners. I know how scary the legal stuff can be. If you found this information helpful, I would be so grateful if you could share it with the fellow business owner. And quite frankly, it doesn’t cost anything to rate, review or subscribe to the show. Your support helps me reach more listeners, which allows me to support more business owners in their entrepreneurial journey. Have any questions or comments about the show? Feel free to drop me a line on Instagram, I promise. I read all of the messages and comments and if you want to be a guest on the show or know someone that would make a great guest, simply fill out our application form and a team member will reach out if we think it’s a good fit. I’ll see you in the next episode.