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Three Reasons to Think Twice Before Agreeing to a 50/50 Split

Business_Partners-300x199If you are contemplating starting a new venture with someone else one of the first questions to discuss is how to divide the equity and profits.  Everyone thinks this topic is easy-peasy.  Your business will be HUGELY successful, there will be tons of money to spare and a 50/50 split of $1 Billion dollars is still a heck of a lot of money.  So you and your partners agree to split everything evenly before addressing what the everyday, real work is going to look like.

In actuality, the dream is usually not as you initially anticipated.  This is why talking about a partnership where equity is divided differently is important.  Without a doubt, this is a hard conversation to have with people you want to work with.  It is imperative, however. Here are 3 reasons why partnerships are almost always not equal.

1)   You and your co-partners will not work the same hours.  Most times you and your partners are at different stages in life.  One of you may be starting a family or seeking a promotion at a full-time job or juggling two part-time jobs.  Someone may be unemployed at the time and able to devote 100 hours a week to the new venture.  Often, time equals money, and the partner putting in more hours may want to think about whether she is comfortable splitting the profits with a partner who can’t devote full-time hours to the new venture.

2)   You and your co-partners have different skills.   It almost never makes sense to partner with someone with the same skill set as yours.  After all, if BOTH of you know a lot about web design and no one knows how to manage the books or recruit clients, then the business won’t go very far.  These varying skills often have different values to a start-up company.  You and your partner should discuss the value your skills bring to the long-term goals of the company and how that value relates to the success and profits of the company.

3)   You and your co-partners are contributing different amounts of capital.  Start-ups cost money.  There are the filing fees, the cost of development and networking, not to mention product development and market research.  All of these cost cold, hard, cash.  People have different comfort levels with regards to how much they are going to pay forward without a guaranteed return.  If one partner is willing to commit more funds (or find people who are willing to take this risk) this might lead to that partner believing he is entitled to more profit.  This is a conversation you want to have BEFORE committing yourself to an even split.

These points suggest that you should have a long discussion with potential partners before agreeing to any split in writing.  Instead of assuming an equal split, each partner should sit down individually and address where she feels her time, skills and money lie in regards to the start-up.  Then the partners can have an open conversation about where things should start.  A good partnership agreement can set out timelines for changing the profit structure over time or if circumstances change.  The key is to set something down in writing that works for the current situation but is flexible enough to change when needed.

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What to Ask Before You Partner-Up

partnerAll throughout grade school, teachers asked us to “partner-up.” If you were anything like me, unless your best friend was also in the class, you spent at least a little time contemplating who would make the best partner. In grade school my criteria usually revolved around who had the coolest color of glitter pen and which classmate’s mom made the best cookies.

Unfortunately, these criteria aren’t very helpful in the business world. If you are looking to “partner-up” you could take a lesson from those grade school days and write down your own list of criteria before committing to a business partnership with another person.

Forming a partnership is serious business and a partner shouldn’t be taken on lightly. In a recent blog post on Forbes.com, Amanda Neville posited that business partnerships are more difficult than marriage.  Think about the care you took (or plan to take) before entering into that partnership. A business partnership should be approached with the same amount of scrutiny and consideration.

While I send my clients home with a full page of questions before meeting with them about the details of any potential partnership agreements, I think there are three questions you absolutely MUST consider before filing any paperwork.

  1. What kind of business do you want to have in the long term? Here you get to think big picture, if everything works out perfectly, what do you and your partner see as being the ideal business? Each partner should develop her own ideas before discussing long term hopes together so you don’t influence each other during this discussion.
  2. How will you settle disputes? In the beginning, it is easy to think you will always agree about everything, but as anyone who has ever worked with a partner will tell you, this is never the case for long. You should talk in the beginning about how you will proceed when you don’t agree. Do all the partners need to agree to move forward? Will you see outside counsel when you disagree? From whom?
  3. What is each partner bringing to the table? Here it is important to talk about finances, expertise and work availability. The best partners are often people that have different skills and interests, because then your business doesn’t have to spend additional time and funds outsourcing critical tasks. Talk about what you see your role in the company being, how much you can contribute both financially and time-wise.

Discussing these points may seem uncomfortable at first, but they are necessary if you hope to build a partnership that won’t crumble at the first sign of trouble.

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What’s Up With Delaware?

Over the past few years I have worked with a lot of people who want to start LLCs, not-for-profits and incorporations.  Even before we meet, I can guarantee that one of the first things I hear will be: “My friend/relative/acquaintance told me I should file in Delaware because it will be cheaper because of taxes.”

I don’t know who this person is that is spreading these rumors, but I wish he or she would stop.

The truth is that for most businesses filing in Delaware does not save any money. Instead, you should form your business (and file the appropriate papers) in the state where you will actually be running  your business.  Before you buy in to the Delaware hype, consider where your offices will be, where you will be opening your shop or where the majority of your clients will be based.

 Why? 

Your home state (you know, the one where you will actually be operating your business from) will want to see documentation that you are registered to do business THERE .  If you are doing business in New York (for example), meaning opening a bank account, interacting with customers, signing a lease or seeking a license, the State of New York wants you to be registered there (and other states feel similarly).

Only now that you have formed your business in Delaware (and paid Delaware all the filing fees) you now have to register as a “foreign corporation” in order to operate in your home state.  To register as a foreign corporation you will often have to pay the EXACT same amount of money as if you had just formed the company in your home state.  So essentially your business ends up paying the State of Delaware AND your home state.

So how can start-ups save money?

Believe it or not, the most cost-effective choice for most small start-ups is to register their company where they will be doing business.

The idea that you can save money by registering in Delaware is a MYTH! In short, get all the facts before you jump on the Delaware bandwagon.

I hope you find this useful and that it saves you money. I know a lot of people who wish they would have known about this before registering (and paying in Delaware AND then again in their home state).

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How Do You Decide What Legal Structure Your Business Should Be?

Once someone decides to start her own business, one of the first dilemmas she will be faced with is: what kind of legal structure should I form?

The law offers various types of businesses, from sole proprietorships to LLCs to S Corporations to Not-for-profit corporations.  People starting a business may know what they want to do or sell, but they have trouble determining which legal structure is right for them.

When clients ask me this question I always start by telling them”it depends.”  I then pepper my client with a handful of questions to see how she feels about the following key factors:

– Control.  How much control do you want to have over the business you are starting?  If you want exclusive control then your business is going to take a different form from someone who is looking to share decision-making power.

–Liability.  Some legal structures do not protect your personal assets.  If you are concerned that the money you own personally (as opposed to the business funds) remains separate, you need to choose a legal form that provides for this.

–Raising capital. More basic entities (like sole proprietorships) are restricted in how they can raise capital.  If you are planning to raise funds through means like selling shares, you should consider a legal structure that allows you to do this.

–Taxes.  Each legal form is taxed differently.  You should get advice from an accountant and make sure that the form you choose will be the right financial fit for you.

If you are thinking of starting a business these are some great topics to consider before choosing a legal structure.  Do any business owners have other tips or factors they considered when deciding the legal structure their business would take?

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What’s in a Name?

In the current economy, a lot of individuals have considered branching out and starting a business on their own.  Many people who start a business by themselves spend a lot of time planning how they will make money:  deciding what they will sell, how they will reach there customers, and how they will manage the day-to-day operations.  Another big business decision is what to call yourself.

Many people have the mistaken belief that if they do a google search and find a website address is available then they can use this as their business name.  If, however, you plan to operate a business under anything other than your own name, the law does have a say.  In New York State you must file a Certificate of Assumed Name with the government and tell them what name you will be using.  The form is only one page and the fee is low (only $50).  This step can be crucial, though.  If you enter into any contracts under the name of your new business (for renting space, hiring employees, or purchasing supplies and materials) and you have not filed the form, all of those contracts could be completely voided and/or unenforceable.  Unenforceable contracts means customers can demand refunds, landlords can change the terms of a lease, and suppliers can back out of promises.  Don’t get caught with a document that cannot be enforced.  The time and cost of the Certificate of Assumed Name is well worth the effort.