Brad Nakase, Attorney
Becoming a partner in the business of your choice is an exciting time. Perhaps an individual has been offered the opportunity to invest in a partnership, or he or she has been promoted to partner in their firm, be it in the fields of accounting, architecture, law, or something else. After a little celebration over your new promotion, it is time to ask yourself—and the firm and its partners—some questions. How does becoming a business partner change an individual’s financial future? How can be a partner in a business change one’s life?
Becoming a new business partner is an exhilarating prospect; it can also be challenging and risky. Therefore, before signing up to be a full-fledged partner, it makes sense to go over some of the finer points of a business partnership and even find out a little more about the business. It also helps to understand the goals of the company and your own ambitions. Here, we will provide a brief list of essential aspects to consider before you partner up.
6. Be Familiar with the Business’s Finances
Buying into a business partnership means that you are now a business owner. If that is a little surprising, do not worry because many people do not equivocate these two terms. As a potential owner of the business, it is vital for you to be aware of profits and revenue, debts, and other pertinent information. We recommend that all prospective partners go over the company’s records, delve into the books, and take time to digest all of the financial information. For-profit companies are dedicated to making money, and if there is a problem with something so fundamental, now is the time to be aware of it and confront it.
All of this information should be made available to you as a prospective partner and owner, but if it appears that any of the other partners do not want to share financial information, that should be a warning sign. In any case, we recommend that all interested partners also go over the company’s average income and overall cash flow that runs through the business and the expenses that are significant, and all liabilities. Ask for at least three years of records, as this will help you to get an overall picture of financial stability, or lack thereof.
A business lawyer may be a helpful reference for this step. A licensed legal professional can help you take a look at financial forms of interest and validate your decision to join the business—or the opposite.
5. Be Familiar with the Partnership Agreement
A partnership agreement is a fundamental piece of every business partnership. These documents detail the exact terms of the ownership of the business. The deal will also designate a trusted individual who will be able to take care of everyday decisions. Now, these agreements are mainly referenced when there is a dispute or an event such as a termination or death of a partner occurs.
This agreement is crucial for you to read and understand as a new partner. The operating agreement will be your guide once you sign on the dotted line. Therefore, it is essential to read and go over the entire document, concentrating on the sections that discuss extraordinary things such as dissolution, death, termination, and what happens when one partner decides to leave or what occurs when the partnership is unable to pay its liabilities.
When an individual is made partner, they are instantly linked to everything that is covered in the partnership agreement. However, too many eager employees or entrepreneurs do not spend enough time going over this binding document. Take your time, and call a business lawyer if you have any questions about the terms or articles. You may be excited to make this exciting career move, but you will be glad you spent time on this in the long run.
4. Understand the Different Types of Partners
Of course, different business partnerships can have different types of partners—that makes sense, correct? Some partners are happy to receive a fixed income amount annually, and others share in the total profits and losses of the company. It is important to note that you should be fully aware of how much will be given to you if you share in the overall company profits.
This point goes back to the initial idea of checking every box in the partnership agreement since the type of partner you are will be noted in the partnership agreement. Based on what type of partner you are, your allocation of profits might be different from your allocation of losses. Paying attention to these important details is crucial for your own success in the company, not to mention your peace of mind.
3. Be Aware of the Taxes and Liabilities That Come With Being an Owner
Our personal finances change as our lives continue and our business careers fluctuate. Going along with this, our tax situations change as well—sometimes for the better and sometimes for the worse. Of course, this is normal, but now that you are considering becoming a partner in a business, you should be even more aware of not only your personal tax and liability situation but the taxes and liabilities that come with being a business owner.
Partners are taxed on their share of the business partnership’s income. Based on this, the partnership is able to distribute earnings (usually not in the form of cash) to individuals—but these individuals are responsible for the incurred taxes. While employee taxes are withheld, taxes on owners are not. So, an individual might find they need to make tax payments for federal and state tax liabilities each quarter. Also, tax returns may need to be filed in each state in which the business partnership operates, regardless of if the owner worked in the state personally or not. Unfortunately, this might create the need for additional state tax payments.
The best thing to do is to inquire if the partnership you are joining files composite tax returns or withholds state taxes for nonresidents in any state. Also, discuss all of this with an accountant, tax advisor, business lawyer, or even all three. As a partner in a business, you will enjoy many benefits, but your tax filing process instantly becomes more complex.
Lastly, find out of the partnership agreement you are going to sign, or have signed, works to limit each partner’s liability in the case of lawsuits filed against the business. This information will let you know if it makes sense to get a personal umbrella insurance policy, and/or give new titles to some specific personal assets. These acts could provide valuable individual protection.
2. Financing Your Buy-In
There are numerous options available to individuals who are negotiating how to finance their buy-in to a company. To become a partner in any business, one needs to have the capital and resources available to them in order to pay what is expected of the company and other partners. Some find that borrowing money from the bank in the form of a loan can provide the needed funding for purchasing a partnership interest. Others find that their desired partnership allows them to pay overtime or see an agreement such as a reduction of future capital distributions in order to substitute for payment.
In any case, if an individual has good credit and a strong and experienced bank branch on their side, they should be able to find a few different ways to buy into the company and then compare them. Remember, choose the option that best suits your financial situation. When becoming a partner in a new business, it is essential, to be honest with oneself and not accrue too much new debt due to joining the business. We also recommend speaking with your financial advisor or accountant and possibly a business lawyer. Weigh your options, do the research, and choose what works best for you.
1. Rely on the Experts
Regardless of the businesses, you have been a part of in the past, or even the companies you have run, do not underestimate the significance of what you are planning to do. Becoming a partner in a business can be exciting and rewarding, yet it is also a complex process. Instead of being unsure of some of your decisions, or leaving things up to chance, trust in the experts that you surround yourself with. From the opinions of family and friends and trusted colleagues to professionals that you may hire, outside perspectives are vital to this complicated process. For example, contact a licensed business attorney to go over the partnership agreement with you before you sign it. Contact a tax advisor or accountant to go over the financial agreements, proposed tax structure, and buy-in process before signing the documents. You may find you need to call on other experts at this time, and that is fine.
Having others help you out as you complete this significant step in business and in life is not a sign of weakness. On the contrary, it is a sign of knowledge, wisdom, and strength. Also, before committing to the partnership agreement, see what the terms are. Can you change it at any point? Are some of the terms contingent upon certain milestones or accomplishments? Is there anything in the agreement that you are unsure of or cannot support? Now is the time to voice your concerns and find out as much as you can, not only about the documents you are signing but also about the business itself and the other involved partners. Remember, trust and communication are both essential before, during, and after this process.
Nakase Wade is Here to Help
Our California business lawyers have the utmost experience helping new business owners and partners go over all of their options, review their agreements and contracts, and negotiate the best possible deals. In addition, our skilled attorneys enjoy helping interested individuals find out what it takes to become partners in a new business and then accomplish that goal smoothly. We offer free consultations, so call one of our experienced business lawyers today.