Don’t Default To A General Partnership
April 4, 2011 | By Vela Wood
Clients approach us all the time with issues associated to their small business partnerships. Problems arise such as business partners making bad business decisions, running up debts, mismanaging money or even trying to hide income from the partnership…you’d be really surprised what goes on out there.
We will ask, “Why did you decide to operate as a partnership?” And 9 times out of 10 the response we get is, “I don’t know…we never talked about it. We just wanted to get the business going and said we would split the profits 50/50.”
Ouch.
In these scenarios, startups find themselves having fallen into a general partnership structure as a default business structure, rather than defining the relationship of the owners up front.
Part of our job at VW in consulting you on your startup is to play the “what-if” game.
What if this happens to your business? What if that happens?
As we play out all variety of potential situations, it crystallizes which entity structure is going to provide you with the proper footing for your business. In some instances, a partnership may make total sense, but you need to know when you shake hands and agree to “split the profits 50/50” that it is for better or worse, rich or poor, until one of you dissolves the relationship. Oftentimes, an LLC or Corporation would be preferred, even with a 50/50 ownership split. Whatever the entity, please be sure and get an agreement between the founders spelled out in writing up front, so that when we do happen across any of the issues discussed above everyone knows their rights.