Adding a Business Partner

July 05, 2016

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There are many reasons why you may want to add a business partner. If your business is growing, you may need more operating capital or help managing the work load. Perhaps you want to reward or incentivize your employees. 

You will need to review your organizational documents to determine the necessary steps for adding a new owner. You will also need to decide how much the new partner will be required to pay for the ownership interest.

You need to be comfortable that your new partner is adding enough value to justify sharing the profits of the business with him or her. An effective business partner is someone with complementary skills and who expands what you can do as a team. Once you’ve added a partner it can be very complicated and difficult to unwind this decision.

  • Here are some issues to consider:
  • Do you have similar business goals?
  • Will you be able to work with this person?  Do you share the same work ethic?
  • How will work be divided?
  • If you are 50/50 partners how will disagreements be resolved?   
  • Does this person have other interests that will take significant time and energy away from the business?
  • Has this person signed a non-compete agreement with a former employer that prevents him or her from entering into a partnership with you?

Friends or family members do not necessarily make good business partners. The stresses of running a business together can ruin a friendship. It can also be particularly challenging to go into business with your spouse. 

Once you add a business partner, it can be very complicated and expensive to unwind this decision. Be sure to have agreements in place to protect yourself and your business:

  1. Do your company’s governing documents setting forth the duties and obligations of each owner need to be revised? 
  2. Do you have Buy-Sell Agreement in place? This document enables one or more owner(s) to buy out another owner in the event that person dies, becomes disabled or leaves the business. It can be very challenging and expensive to leave a business or to remove a partner if the owners disagree on how this will be handled.

Special Considerations for Limited Liability Companies. There are a number of legal issues and tax considerations involved in adding a partner to a limited liability company.

  1. How much is the new partner investing in the company? 
  2. What will the new ownership interests be?
  3. Do the existing owners need to pull money out of the company?
  4. Are there any existing loans to the business that must be repaid?
  5. Who is responsible for existing company obligations?
  6. How will work in progress and accounts receivables be handled?
  7. How will business decisions be made?
  8. Will the owners be receiving salaries or guaranteed payments?
  9. Do you need an election to split the tax year into 2 portions as of the date the new partner is added?

Adding business owners can be tricky. Business owners should consult with their legal and tax advisers for interpretation of specific requirements concerning adding partners to their businesses. For more information, please contact Kathy Tremmel at Tremmel Law, PLLC at (512) 539-0317 or kathy@tremmellaw.com.

Topics: Legal

Kathy Tremmel

Tremmel Law

Kathy Tremmel has significant experience both as a business attorney and corporate executive. Her career spans both legal practice and business management and she opened her own solo law practice in January 2010. In additional to running her own practice, she also is of Counsel with Selman, Munser & Lerner, which is a business transaction law firm in Austin, Texas. Ms. Tremmel has more than 10 years’ experience as a business attorney, providing transactional legal services to a diverse client base, from start-up ventures to well established companies. She helps companies with all their contracts, including customer agreements, non-compete agreements, employment agreements, buy-sell agreements, loans, and leases, helps people set up new businesses, and represents buyers and sellers of businesses. In addition, Ms. Tremmel has 10 years of management experience working with start-up companies. As VP of Operations at Tusker Group, an international litigation support company, Ms. Tremmel led international teams, managed production and quality issues, handled price negotiations, worked closely with clients to determine the scope of their projects, provided project management services, and developed, implemented and documented best practices for processing and training. Ms. Tremmel earned a Doctor of Jurisprudence from the University of Colorado School of Law and a Bachelor of Arts from Dartmouth College. She is a Texas licensed attorney and a certified Project Management Professional.
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