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:
- Do your company’s governing documents setting forth the duties and obligations of each owner need to be revised?
- 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.
- How much is the new partner investing in the company?
- What will the new ownership interests be?
- Do the existing owners need to pull money out of the company?
- Are there any existing loans to the business that must be repaid?
- Who is responsible for existing company obligations?
- How will work in progress and accounts receivables be handled?
- How will business decisions be made?
- Will the owners be receiving salaries or guaranteed payments?
- 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 firstname.lastname@example.org.