Adding an Owner to Your Business
Published March 31, 2015 | Updated September 30, 2015
by Kathy Tremmel, Business Attorney
Business is going well and you want to bring in a partner. Perhaps you need help managing your work load. Maybe you want to reward employees with ownership in the business. Or, you want to expand and an investor is demanding an ownership interest in return for his investment.
Determine Whether the Partner Will Be a Good Fit
- Is this person bringing enough value or skills to the business to justify sharing the profits of the business with him or her?
- Do you have similar business goals?
- Do you share the same work ethic?
- Will you be able to work with this person’s personality, especially if things are not going well?
- Is this person committed to the business or does he or she have other interests that will take significant time and energy away from the business?
- Do you trust this person?
- What skills will each owner contribute? How will work be divided?
- Is each owner sharing the financial commitment to the business?
- How will disagreements be resolved?
- Has this person signed a non-compete agreement with a former employer that prevents him or her from entering into a partnership with you?
An effective business partner is someone with abilities and skills that complement yours and can expand what you can do as a team. 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.
It can be very complicated and expensive to unwind the decision to add a partner. Protect yourself and your business with the following documents:
- Governing documents setting forth the duties and obligations of each owner. Typically, this is a Company Agreement in the case of an LLC, Bylaws in the case of a corporation, or a Partnership Agreement in the case of a partnership.
- A Buy-Sell Agreement setting forth the terms for 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 (LLCs)
If you are adding a partner to an existing limited liability company, there are a number of legal issues and tax considerations to address. Some of these issues include:
- 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.
Article and information is courtesy of Kathy Tremmel, Business Attorney at Tremmel Law, PLLC. Amplify Credit Union does not endorse or guarantee the perspectives, the advice, the users, the businesses, or the products or services sold by any users or businesses that appear in this article.