CHOOSING THE BUSINESS LEGAL STRUCTURE
                  Mostly from "The Small Business Start-Up Guide" by Robert Sullivan...
Partnership Disadvantages:
•Formation and subsequent changes in structure are complex.
•Problems with partner(s) as the re...
S-corporation Advantages:
•Owners enjoy personal limited liability as in a regular corporation.
•No Federal income tax lia...
ESTABLISHING PARTNER RESPONSIBILITIES IN A NEW BUSINESS
                          To Be Done Once It Has Been Decided More...
MAKING YOUR CHOICE
It is difficult to give specific advice as to the choice of legal business structure since every situat...
7. What is the Extent of LLC Recordkeeping and Paperwork?
The limited liability company is usually only required to keep a...
ANOTHER VIEW ON ESTABLISHING PARTNER RESPONSIBILITIES IN A NEW BUSINESS
To Be Done Once It Has Been Decided More Than One ...
ENTITY COMPARISON TABLES
                              (Options for Business Organization)

Forms of Ownership            ...
Avoiding Partnership Pitfalls
                                                 by Karin K. Schaff

Have you ever noticed h...
relationships can be critical to the success and survival of your business. Here are some things you should
consider as yo...
Finding, formulating, nurturing, strengthening, and cultivating partner relationships takes time, resources,
company-wide ...
POINTS TO BE CONSIDERED IN PLANNING A PARTNERSHIP AGREEMENT

                 (Including Limited Liability Corporations wi...
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CHOOSING THE BUSINESS LEGAL STRUCTURE

  1. 1. CHOOSING THE BUSINESS LEGAL STRUCTURE Mostly from "The Small Business Start-Up Guide" by Robert Sullivan Okay, you've chosen your business. What next? No doubt, one of the most asked questions by the prospective business owner is "Should I incorporate?" To answer this question, we need to examine what the options are and their respective advantages and disadvantages. So as not to keep you in suspense, it should be noted that most new small businesses will not incorporate - but will operate as a sole proprietorship. Actually, you have three basic business structures from which to choose: 1.Sole proprietorship 2.Partnership (limited or general) 3.Corporation (S, C or LLC) The legal structure you choose depends on a number of things, including your type of business, individual situation, goals for the business, and a number of other personal and financial factors. Before deciding what's best for you, discuss your plans with your accountant and attorney. Make sure you are prepared to describe your business plans in some detail. It will be money and time well spent. Making the right choice can help you avoid a mistake that can cost you big in terms of possible future liability. Before you have any discussions with your professional advisors, it is useful to understand the basics of the various legal structures available to you ... sole proprietorship, partnership, and various forms of corporations. SOLE PROPRIETORSHIP This is the most popular form of small business and, as the name implies, ownership is totally vested with one person. It is the easiest to establish since no legal formalities are necessary. The only business requirement may be a license from your local jurisdiction to allow you to conduct the type of business you are planning. For example, you may need a license to sell food to the public. Sole Proprietorship Advantages: •Easy and quick and usually the least expensive to establish. •You have total ownership and control of the business. •All the profits of the business belong to you, the owner. •No additional Federal taxation on business profits (No double taxation). •No periodic business reporting to the IRS or other government agency is required. •Income tax filing is simply part of your annual personal tax return (Schedule C). Sole Proprietorship Disadvantages: •The owner is personally liable for all business debts and the liability is not limited to the value of the business. You are personally liable for any and all business debt you incur. •It is generally more difficult to borrow money or obtain outside investment than with other types of legal structures. •If the owner is incapacitated for any reason, the business is likely to fail. •All management responsibility is with the owner which can be a heavy burden. IMPORTANT NOTE A "home business" is frequently a sole proprietorship and offers a number of unique advantages. However, just because you are conducting business from your home does not exempt you from possible legal or other liabilities. PARTNERSHIP This type of business is just what the name implies: Business ownership is divided between two (or more) partners. The general partnership is the most common and is formed to conduct a business with two or more partners being fully involved in the operation of the business. All the partners share both profits and liabilities. A limited partnership, as the name implies, provides for limited liability of the partners. (This liability can be no greater than the partner's investment in the partnership). In a limited partnership there must be a least one general partner who remains liable for all the debts of the partnership. Forming a partnership is complex and legal advice is very important. The kind of partnership and the type of partner you will be determines your potential personal liability. Partnership Advantages: •Synergy as a result of pooling partners' different areas of expertise. •The partnership does not pay Federal in-come taxes. An informational tax return (IRS Form 1065) must be filed which shows the pass-through of income/loss to each partner. •Liability may be spread among the partners. •Investment can come from the partners in the form of a loan which creates interest income for the partners and a business deduction for the partnership. 1
  2. 2. Partnership Disadvantages: •Formation and subsequent changes in structure are complex. •Problems with partner(s) as the result of misunderstandings, different goals, etc., can weaken or destroy the partnership. •Limited partners are liable for debt if they are active managers in the business. General partners have unlimited liability. You may also be liable for the commitments of your partners. CORPORATION There are three major types of corporations, the C-corporation ("regular corporation"), the S-corporation (or "S-Corp"), and the Limited Liability Corporation (or "LLC"). All of these forms of the corporation are complex legal entities. Their detailed structure may vary from state to state (incorporating a business in a given state allows you to conduct business only in that state). It is essential for you to obtain legal advice if you are thinking about forming a corporation. Since each state has its own set of corporation laws, you should contact the appropriate state office in your state (usually the office of the Secretary of State) for additional material and procedures. Most offices can provide a guide for new businesses to follow for incorporation and doing business in their state. Call or write for a copy. Most people immediately think of incorporating in order to minimize their personal liability. Indeed, the liability of stockholders (owners) in a corporation is limited under certain and complex conditions. Today, with the Tax Reform Act of 1986 and other legislation, there are really few good tax reasons to incorporate (with the exception of dividing corporate profits as noted below). The best reason for incorporating is, in fact, the limited liability. However, there is no such thing as total insulation from liability resulting from doing business as a corporation. Record keeping and tax matters with a corporation are difficult and time-consuming tasks usually requiring the services of an accountant. You need to keep this in mind when considering operating costs for your business. Avoid the "do it yourself" incorporation guides. Incorporating is a complex process and you should not take on the task yourself. You cannot afford any mistakes at this point in your new business, so if you decide incorporation is for you, do it right and spend the money required to have it done professionally. Legal fees for setting up a corporation can run between $350 and $1,500 (assuming it is relatively straightforward). REGULAR CORPORATION The corporation is a taxable entity and, as such, pays taxes. This results in the "double taxation" you may have heard about. The corporation pays corporate taxes on its profits, and then, you the owner (shareholder), pay personal taxes on the dividends your corporation pays you. (The dividends are not deductible by the corporation). This is one of the biggest disadvantages of a corporation. On the other hand, incorporating your business usually makes it easier to establish credit with suppliers and borrow from banks. If you expect to use outside investors for business capital, a corporation is a must. Regular Corporation Advantages: •Shareholders (the owners) enjoy personal limited liability. •It is generally easier to obtain business capital than with other legal structures. •Profits may be divided among owners and the corporation in order to reduce taxes by taking advantage of lower tax rates. •The corporation does not dissolve upon the death of a stockholder (owner) or if ownership changes. •Favorable tax treatment for employee fringe benefits including medical, disability, and life insurance plans. •70% of any dividends received by the corporation from stock investments are deductible (unless you purchased the stock with borrowed money). Regular Corporation Disadvantages: •More expensive and complex to set up than other legal structures. •Completing tax returns usually requires the help of an accountant. •Double taxation on profits paid to owners (corporation pays corporate taxes on profits and owner pays personal taxes on dividends from the corporation). •Recurring annual corporate fees. •Tax rates are higher than individual rates for profits greater than approximately $75,000. •28% accumulated earnings tax on profits in excess of $250,000. •Business losses are not deductible by the corporation. S-CORPORATION The S-corporation offers the limited liability advantages of a corporation but does NOT pay Federal taxes. All the earnings and losses of an S-corporation are passed through to the share-holders. It is a popular form of incorporation in the startup years of a business but there are some subtle disadvantages that need to be taken into account as you grow. Again, because of the complexities involved, talk with your attorney and accountant. 2
  3. 3. S-corporation Advantages: •Owners enjoy personal limited liability as in a regular corporation. •No Federal income tax liability, and in most cases, no state income tax. •3. Profit/losses are passed to owners ... no double taxation. •The S-corporation does not dissolve if one of the owners dies or otherwise leaves (like a regular corporation). •Wholly owned subsidiaries are permitted. S-corporation Disadvantages: •Legal assistance is required to set up. •Maximum of 75 shareholders. •Only one class of common stock is permitted (no preferred stock). LIMITED LIABILITY CORPORATION (LLC) This type of corporation blends the tax advantages of a partnership and the limited liability advantages of a corporation. Owners of an LLC are referred to as "members." As you might expect, it also has some limitations but is definitely worth considering. Ask about the LLC when you contact your appropriate state office for incorporation information as suggested earlier in the chapter. LLC Advantages: •Limited personal liability for the owners (like a corporation and unlike a partnership). •No Federal taxes (like a partnership). •No limit on the number of stockholders (unlike an S-corporation). •More than one class of stock is permitted (unlike an S-corporation). •Business losses may be deducted on your personal tax return (like a S-corporation). LLC Disadvantages: •Legal assistance is required to set up. The paperwork is complex. •No "continuity of life" as in a regular corporation. The LLC dissolves if one of the owners dies or otherwise leaves. However, other formal agreements between the owners can overcome this. •Some states require that an LLC have more than one member. NOTE: Depending on the charter and underlying documents etc. the IRS can determine that the organization should be taxed as a regular corporation. Be certain to get really good legal advice on this form of organization. PROFESSIONAL CORPORATION Groups of certain professionals can form corporations knows as professional corporations or professional service corporations. The list of professionals covered by professional corporation status differs from state to state, it typically covers accountants, engineers, physicians and other health care professionals, lawyers, psychologists, social workers, and veterinarians. Typically, these professionals must be organized for the sole purpose of providing a professional service - for example, a law corporation must be made up of licensed attorneys. In certain states, this is the only incorporation option available for certain professionals, whereas in others, they are given the choice of being either a professional corporation or S or C corporation. Contact your states filing office to see what options are available in your state. According to tax and legal experts, there is no longer a significant tax benefit to professional corporation status over sole proprietorship or partnership. The IRS treats most professional corporations as "personal service corporations," taxing corporate income at a flat rate of 35%. Professional corporations can shield owners from liability. While it can't protect a professional from his/her own malpractice liability, it can protect against liability from negligence of an associate. Malpractice insurance is still the way to go for most professionals, however. Still, you might want to consider this corporate status as a back-up against rising rates or inadequate coverage. BENEFITS Owners not liable for negligence of other owners Disadvantages Higher cost and more paperwork than a sole proprietorship or partnership Ownership restricted to members of a certain profession. 3
  4. 4. ESTABLISHING PARTNER RESPONSIBILITIES IN A NEW BUSINESS To Be Done Once It Has Been Decided More Than One Person Will Be Active In Managing The Business Often a new business is made up of friends or family who will be active in the business and/or asked to invest in it. At other times people come together to form a new business. Whenever some type or partnership or co-ownership occurs, it is vital for the survival of the business that an agreement is reached between all parties concerning who will be responsible for what. A lack of such an agreement can result in a breakup of friendships or family, wasted time and energy, larger than necessary legal and accounting fees, and possibly the business's failure. To help establish responsibilities, each person involved should independently make the following lists. 1. What do I believe my responsibilities are/will be? 2. What do I believe the other person(s) responsibilities are/will be? 3. What do I believe the other person(s) believe my responsibilities are/will be? If the members of the firm are also investing money, add the following lists to the exercise: A. Who puts in how much? B. If one person is putting in the concept and/or equipment, does that constitute a share in the business? C. How does the amount of investment relate to the percentage of ownership of the business? D. Who gets what salary and is this in relationship to the ownership and/or title/job function(s)? E. When the business shows a profit, how and when will the profit be divided or dividend paid? F. If additional money is needed, who puts in how much and does this change the percentage of ownership of the business? G. If the business fails, who will be responsible for what part(s) of any debt? H. If the business fails how will the dispersement of any assets be handled? I. If one of the partners wishes to withdraw or one partner wants the other to withdraw, who will establish the value of the business and how will the settlement be made? When everyone has completed their lists, the lists should be compared and differences worked out before proceeding with the business's plans. This exercise applies whether the business format will be a partnership, LLC or C or S Corporation. © 2001 Alan J. Zell, Portland, OR All rights reserved Permission for use by SCORE granted by the author 4
  5. 5. MAKING YOUR CHOICE It is difficult to give specific advice as to the choice of legal business structure since every situation will be unique. The advantages and disadvantages noted above should be assessed based on your particular situation. In any case, it is important to discuss your plans with advisors including both an attorney and an accountant prior to making your final decision. The various tax consequences for corporations and partnerships are complex and must be carefully considered for each specific situation. LIMITED LIABILITY COMPANIES: THE 11 MOST FREQUENTLY ASKED QUESTIONS 1. What is the advantage of an LLC over a general corporation? One of the primary reasons individuals form corporations is to protect their personal assets in case of a legal judgment against the company. Unfortunately, owners are taxed twice on their income: once at the corporate level and again at the personal level when dividends are paid. The LLC, on the other hand, offers both personal asset protection and the elimination of corporate-level taxes. In addition, the record-keeping requirements of a corporation are far greater than those of the limited liability company. 2. What is the advantage of the LLC over an S Corporation? While the S corporation's special tax status eliminates double taxation, it lacks the flexibility of an LLC in allocating income to the owners. For example, the owner of 25% of an S corporation normally pays 25% of the taxes on reported income. On the other hand, LLC owners are free to divide income and tax liability among themselves within the constraints of IRS regulations for distribution of partnership income. Equal partners may change the allocations of profit or loss from year to year to benefit their individual tax needs. In addition, LLCs have no ownership restrictions. An S corporation limits the number of owners to just 35 and prohibits corporate and foreign ownership. 3. Why is the LLC Superior to a Joint Venture or General Partnership? The personal assets of owners of joint ventures and other forms of general partnerships are totally exposed to lawsuits stemming from the actions of any one partner. All personal assets of the LLC partners are legally protected. Partnerships of every form and LLCs enjoy a great deal of flexibility compared to corporations when allocating their tax attributes. 4. Why is the LLC Superior to a Limited Partnership? Limited partners are protected from business-related lawsuits that may place their personal assets at risk. However, this structure prevents them from actively participating in the management of the business. The non-limited partners' personal assets are exposed. LLCs are designed to protect all partners' personal assets while imposing no limit on their management activity. 5. Why are Foreign Entrepreneurs Attracted to LLCs Versus Other Business Structures? Business entities similar to the limited liability company have been popular in European and Latin American countries for more than 100 years. LLCs often prove to be the most familiar and least imposing business structure for foreign entrepreneurs who wish to enter the American market. There is another clear attraction for foreign owners. If their LLC does not earn income within the U.S., and receives no income from U.S. business enterprises, these foreign owners are normally not subject to U.S. federal income tax. 6. How do I Form a Limited Liability Company? You can form a limited liability company yourself by reading a book or articles available from www.nolo.com and obtaining the necessary forms from the Secretary of State of the state in which you want to form the LLC. You may also choose to employ the services of an attorney or a professional service company to aid you. Professional service companies are low-cost alternatives that completely eliminate all the uncertainty and paperwork involved. One of the nation's largest service companies is: Corporate Agents, Inc. 2711 Centerville Road, Suite 420 Wilmington, DE 19808 (800) 499-9519 www.instacorp.com/about.cfm In addition to helping LLC startups at very low cost, CAI can assist in the formation of LLC’s or corporations in most foreign jurisdictions. However, LLC’s are a new form of legal organization and vary from state to state. So you may want to use a local lawyer who promises that he KNOWS LLC’s for the state and EXACTLY what is required. 5
  6. 6. 7. What is the Extent of LLC Recordkeeping and Paperwork? The limited liability company is usually only required to keep a copy of the Operating Agreement and a list of the LLC members. In most states, owners are not required to make their Operating Agreements public, and they can modify the agreement as needed. 8. Are There Special Restrictions for Selecting an LLC Name? In most states, the name you choose must contain one of the following words: "Company," "Association," "Club," "Foundation," "Fund," "Institute," "Society," "Union," "Syndicate," "Limited," or "Trust." Abbreviations are permitted. In most cases, the name should contain the words "Limited Liability Company" or the abbreviation "L.L.C." Contact your state of formation for specific requirements. 9. Can I Convert my Corporation into an LLC? In most states, you can convert your existing corporation to a limited liability company through a merger process. After the new LLC is formed, the merger documents are filed with the secretary of state's office. When filing the merger, the original corporation is listed as the non-surviving entity. After this is completed, you may wish to consult with an attorney or an accountant in order to arrange the most advantageous transfer of the assets to the LLC. 10. How Much Does it Cost to Form and Maintain an LLC? To form a limited liability company, you normally only pay the required state filing fees. Your attorney may add an additional charge on top of the state fees. A possible middle ground is to use a professional service organization which markets its services to the general public, such as Corporate Agents, Inc. 11. What are My Annual Costs for Maintaining an LLC? Most states levy an annual franchise tax, which ranges from as low as $100 in Delaware to as high as $800 in California. In addition, some states charge an annual filing fee. This resource is (c) 1995 by The Oasis Press, and is excerpted from "The Essential Limited Liability Company Handbook". COMMENTS ON LLC’S BY ANOTHER SCORE CYBER COUNSELOR LLCs are fairly recent compared to other forms of ownership and have not been tested in the federal and state courts sufficiently. Some states have been slower than others to perfect the gray areas. Clients think that LLCs offer the liability protection of corporations and the single taxation feature of partnerships and "S" corps. This may or may not be so in every state and the IRS may also not be convinced. We recommend that your tax advisor have the final word. In some states, more case precedent is needed before there is a more definitive answer. Some lawyers are aggressively promoting LLCs without pointing out it's shortcomings to their clients. We also suggest that clients load up on personal liability insurance. There can be a feeling of significant vulnerability among business owners when lawyers try to pierce the corporate shield and hold the owners liable (nuisance suits). Additionally, lenders always want personal liability even for business loans to incorporated small businesses. COMMENTS ON LLC’S BY SCORE CYBER COUNSELORS RE ALLOCATION OF OWNERSHIP I have a client that is trying to get some information on the allocation of profit and loss for a start-up limited liability company. He is trying to determine how others in his situation have typically divided the profits. The issue primarily concerns the fact that 2 members are putting up the labor and the management, while 2 others are putting up the equity capital (25% of the project's overall funding--the other 75% is a bank loan which all 4 members are personally guaranteeing). I have tried to assure him that they can establish whatever they think is fair among themselves. However, he is wandering if there is anyone that has specific knowledge of allocation percentages for LLCs or if they can reference some material for him to research. Any answers?? • As I see it your answer is the correct one. I don't think there is any formula per se. Each member contributes and they must agree among themselves what the fair percentage would be for each partner • I have always advised clients that the return should be proportional to the risk that is assumed. The hard part is to define the risk.The rest is easy. 6
  7. 7. ANOTHER VIEW ON ESTABLISHING PARTNER RESPONSIBILITIES IN A NEW BUSINESS To Be Done Once It Has Been Decided More Than One Person Will Be Active In Managing The Business Often a new business is made up of friends or family who will be active in the business and/or asked to invest in it. At other times people come together to form a new business. Whenever some type or partnership or co-ownership occurs, it is vital for the survival of the business that an agreement is reached between all parties concerning who will be responsible for what. A lack of such an agreement can result in a breakup of friendshipsor family, wasted time and energy, larger than necessary legal and accounting fees, and possibly the business's failure. To help establish responsibilities, each person involved should independently make the following lists. If there are more than two, then each makes several lists as it relates to the other. When everyone has completed their lists, the lists should be compared and differences worked out before proceeding with the business's plans. This exercise applies whether the business format will be a partnership, LLC or C or S Corporation. 1. What do I believe my responsibilities are/will be? 2. What do I believe the other person(s) responsibilities are/will be? 3. What do I believe the other person(s) believe my responsibilities are/will be? If the members of the firm are also investing money, add the following lists to the exercise: A. Who puts in how much? B. If one person is putting in the concept and/or equipment, does that constitute a share in the business? C. How does the amount of investment relate to the percentage of ownership of the business? D. Who gets what salary and is this in relationship to the ownership and/or title/job function(s)? E. When the business shows a profit, how and when will the profit be divided or dividend paid? F. If additional money is needed, who puts in how much and does this change the percentage of ownership of the business? G, If the business fails, who will be responsible for what part(s) of any debt? H. If the business fails how will the dispersement of any assets be handled? When everyone has completed their lists, the lists should be compared and differences worked out before proceeding with the business's plans. This exercise applies whether the business format will be a partnership, LLC or C or S Corporation. S Corporation vs. LLC’s A view by another SCORE Counselor SCORE isn't able to give you legal or tax advice but I'm glad to share a few observations. I started my own company as an "S" corp. because it offered some personal liability protection and maximized tax write offs. I also loaded up on personal liability insurance because plaintiffs' lawyers often try to pierce the corporate shield and sue the individual owners as well as the corporation. There are 2 different tax issues to address with your CPA accountant. 1. Which owning entity offers the best initial startup cost write offs, and 2. Which offers the best continuing write offs. It's possible that the "S" corp. offers better initial write off of start up costs and maybe they're both equal after that. If that's the case, the opportunity to maximize your start up cost write offs is a missed opportunity and you can't do much about it now. If you continue to miss write off opportunities, the cost of reforming as an "S' corp., compared to missing tax write off opportunities, may be something to consider. It seems to me that lawyers are often too quick to use the LLC form of ownership that is in vogue these days so do ask the question along the above lines. 7
  8. 8. ENTITY COMPARISON TABLES (Options for Business Organization) Forms of Ownership Advantages Disadvantages Low start-up costs Unlimited personal liability Sole Proprietorship Owner in direct control Lack of continuity Minimal working capital requirements Difficulty in raising capital Tax advantage to owner Ownership limited to one person General Partnership Ease of formation Unlimited personal liability Low start-up costs Lack of continuity Broader management base Difficulty in raising capital Direct sharing of profits Bound by acts of partner C-Corporation Limited liability Activities limited by the charter & regulations Separate legal entity Most expensive form to organize Transferable ownership Double taxation Ease of raising capital S-Corporation Limited liability Must have calendar year Taxed as ordinary income to shareholders Limited to 75 shareholders Transferable ownership Expensive form to organize Ease of raising capital Only one class of stock permitted Limited Liability Company Freedom to choose options No case laws Tax attributes of a partnership Expensive form to organize Flexible management Relatively new legal entity Transferable ownership Limited transfer of interest CHARACTERISTIC Sole General LLP C-Corp S-Corp LLC Proprietor Partnership Limited Liability for ALL owners No No No Yes Yes Yes Owners can participate in management w/o losing liability N/A N/A No Yes Yes Yes protection Easy to form and no need to keep Yes Yes No No No Yes extensive records 1 or more, 2 or Number of owners One 1 or more 1-35 1-75 except more DC & Mass Restrictions on ownership No No Yes No Yes No Double tax No No No Yes No No Able to deduct business loss on Yes Yes Yes No Yes Yes individual return Able to add any number of additional investors, including N/A Yes No Yes No Yes other entities Flexible distribution of Profits & N/A Yes Yes No No Yes Losses 8
  9. 9. Avoiding Partnership Pitfalls by Karin K. Schaff Have you ever noticed how everyone wants to be your partner? Everyone wants to find a way to help you increase revenue with the latest and greatest gizmos or “secret weapons.” Too many times, we find ourselves in the “partner conversation” with what appears to be a great sales channel, only to find out quickly that it’s a one- way street – you’re finding sales leads and opportunities while your partner makes the money! Partnerships, alliances, strategic networks…whatever you call them, on the surface, they’re nothing more than two companies coming together to find ways to leverage each other’s products and/or services. The goal typically centers on finding additional revenue streams and new market entry points. Very rarely is the word “partner” taken for what it really means, which is someone who shares your business values, ethics, visions, and objectives. And a “partnership” is something that benefits both entities looking to find new revenue sources and business opportunities. Often, companies forget that once you find a partner, you need to nurture the relationship and cultivate opportunities so that you both can reap the rewards. Before you decide to go headfirst into finding the next great partnership opportunity, think about a few things: 1. Do some internal research. Find out where you have strengths and weaknesses. Look for areas where resources are lacking or could be in the future due to market trends and shifts in supply-and-demand needs. Talk to co-workers and department heads about their needs for fresh ideas and creativity. Ask your leadership which market opportunities they want to seek out and champion in the near- and far-term. Talk with your sales and marketing teams to see what customers are saying about your services, product, processes, expertise, etc. Rule of Thumb: Don’t determine what or who will make a good partner in a vacuum. Partner relationships need corporate-wide support to make them work. 2. Who’s already in your camp? Take note of those partnerships you already have and determine their value to your company. Determine where exactly they fit into your organization and offerings. From there, see if you find any gaps where another partner may be needed to complete the solution. Review your current and historical activities with your existing partners to see who is truly making a difference, versus who is just a name on a joint press release. Rule of Thumb: More partnerships aren’t always the best idea. They could actually lead to more management headaches and fewer results. Keep focused on a manageable handful that you can clearly see, and define their roles and objectives within your organization. 3. Take the climate’s temperature. Ask around to see if someone in your organization and/or business network knows of a reputable company who may be interested in partnering. See if your company already uses other businesses to complement your services, and determine whether the relationship can be improved and solidified with defined structure and measurements. Rule of Thumb: Be careful of the “friends and family” network. Many times, business leaders and/or division managers will work with someone they know through a friend or family link because it’s an easy relationship, and they often get a good price. These partnerships may be great for the individual with the personal relationship, but not for your corporation in general. Partners should be selected based on criteria such as market reputation, financial stability and longevity, cultural cohesiveness and similarity, strategic offerings, personality connection with key people, sales and marketing efforts, etc. A true partner relationship will provide you with the flexibility, confidence, expertise, resources, and opportunities you need to drive down a mutually beneficial, two-way street to success. No one said that combining two or more companies to find new business or strengthen core offerings was going to be easy, so why think that way? If approached properly with a strategic plan and commitment from leadership, partner 9
  10. 10. relationships can be critical to the success and survival of your business. Here are some things you should consider as you identify and interview representatives from your potential partners: 1. Do they have the same sort of business culture, values, and ethics that you do? And how dedicated are they to ensuring that everyone works toward that way of thinking? 2. Who are their other partners and what do those partners think of their relationship with the company? What results have they seen that have helped move their companies to new levels of success? 3. Do they have written partner agreements or are the agreements verbal? 4. What can they bring to the table to begin the process of finding new business together? How open are they to doing so? 5. Are they comfortable with offering information about their client base and partner network so you can see where your offerings fit in strategically? 6. Do they have an exit plan in case the relationship doesn’t go in the direction you planned? If there is an exit plan, how easy is it to disengage and remove yourself from the agreement? 7. Do they have an alliance or relationship manager (or champion) dedicated to working with you and helping both companies achieve their mutual and individual options through the partnership? 8. Do you have leadership commitment from both your company and theirs? 9. Can they confidently outline their top objectives for developing partnerships? 10. Do the marketing and sales budgets have monies set aside for partnering activities and programs? 11. Are they enthusiastic about working with you on building a mutually beneficial relationship? Do they actively participate in putting together meetings and discussions on next steps and partnering ideas? 12. Do you or your potential partner have a process for passing leads back and forth? Do either of you have documentation, such as a Memorandum of Understanding, Lead Profile Form, or Partner Relationship Plan Template, to complete – or to use to build a process that integrates well into both infrastructures? Companies are beginning to share their resources and expertise to develop new products, achieve larger-scale economies, and gain access to new technology and new markets. If a company says it “does it all,” chances are that it really doesn’t. Rather, it has partners who provide pieces to the solution puzzle, so the company doesn’t have to turn away potential sales because it doesn’t have the required services or products. There is nothing wrong with this; however, being upfront and honest about your true abilities and core competencies isn’t something to be ashamed of, either. In talking with business leaders, we found that many of them prefer companies that are open about what they do and do best – and where they don’t have strengths, they’re open about the partners they use to offer such expertise. Leaders don’t want someone coming in and saying, “we do it all.” They’d rather hear you say, “we don’t do that, but we work closely with our partner, Company A, to provide that specific expertise.” Now, I bet you’re excited to tell your client or prospect how many great partner relationships you have. Caution! The mere presence of numerous relationships throughout the world is not a differentiator. It’s the depth and strength of the bonds among all of the allies in your network that makes a unique, successful, seamless, quality solution. 10
  11. 11. Finding, formulating, nurturing, strengthening, and cultivating partner relationships takes time, resources, company-wide commitment and dedication, sometimes money, and most of all, a great deal of understanding, patience, and trust. Therefore, before you open the floodgates and take every partner offering that comes your way, think first, plan next, be strategic, and always do your due diligence to make sure it’s a partner relationship worth pursuing – and worthy of your dedication and care. Karin K. Schaff is Marketing and Communications Strategist at 3rd Floor Up, Inc. She can be reached at 585- 671-1432 or kschaff@3rdfloorup.com. Visit her web site at http://www.3rdfloorup.com. ESTABLISHING PARTNER RESPONSIBILITIES IN A NEW BUSINESS To Be Done Once It Has Been Decided More Than One Person Will Be Active In Managing The Business Often a new business is made up of friends or family who will be active in the business and/or asked to invest in it. At other times people come together to form a new business. Whenever some type or partnership or co- ownership occurs, it is vital for the survival of the business that an agreement is reached between all parties concerning who will be responsible for what. A lack of such an agreement can result in a breakup of friendships or family, wasted time and energy, larger than necessary legal and accounting fees, and possibly the business's failure. To help establish responsibilities, each person involved should independently make the following lists. 1. What do I believe my responsibilities are/will be? 2. What do I believe the other person(s) responsibilities are/will be? 3. What do I believe the other person(s) believe my responsibilities are/will be? If the members of the firm are also investing money, add the following lists to the exercise: A. Who puts in how much? B. If one person is putting in the concept and/or equipment, does that constitute a share in the business? C. How does the amount of investment relate to the percentage of ownership of the business? D. Who gets what salary and is this in relationship to the ownership and/or title/job function(s)? E. When the business shows a profit, how and when will the profit be divided or dividend paid? F. If additional money is needed, who puts in how much and does this change the percentage of ownership of the business? G. If the business fails, who will be responsible for what part(s) of any debt? H. If the business fails how will the dispersement of any assets be handled? I. If one of the partners wishes to withdraw or one partner wants the other to withdraw, who will establish the value of the business and how will the settlement be made? When everyone has completed their lists, the lists should be compared and differences worked out before proceeding with the business's plans. This exercise applies whether the business format will be a partnership, LLC or C or S Corporation. © 2001 Alan J. Zell, Portland, OR All rights reserved Permission for use by SCORE granted by the author *********************** 11
  12. 12. POINTS TO BE CONSIDERED IN PLANNING A PARTNERSHIP AGREEMENT (Including Limited Liability Corporations with more than one principal) 1. Name of the Partnership. 2. Duration of the Partnership – number of years or until dissolved. 3. Location of the Office. 4. Capital contribution of each partner. 5. Whether partners may make additional contributions. 6. The level at which the Capital Accounts of the partners must be maintained. 7. Participation of each partner in profits and losses. 8. Salaries, if any, to be paid to partners and whether or not these salaries are to be treated as expenses in determining distributable profits. 9. The amounts of any regular drawings against profits. 10. Duties, responsibilities and sphere of activities of each partner. 11. Buy or sell agreement between partners. 12. Amount of time to be contributed by each partner. . 13. Prohibition of outside business activities by partners that would be in competition with the partnership? 14. Who is to be the managing partner and whose decisions will prevail in case of a tie or dispute? 15. Procedure for admitting a new partner. 16. Methods of admitting junior partners without capital if such a procedure is to be considered desirable. 17. Method of determining the value of goodwill in the business, in case of dissolution of the Partnership for any reason. 18. Method of liquidating the interest of a deceased or retiring partner. 19. Age at which a partner must withdraw from active participation and arrangements made for adjusting his salary and equity. 20. Whether or not surviving partners shall have the right to continue using the name of a deceased partner in the partnership name. 21. Period of time during which a retiring or withdrawing partner may not engage in a competing business. 22. The basis for expulsion of a partner, method of notification of expulsion and the disposition of any losses that arise from the delinquency of such a partner. 23. How will the protracted disability of a partner be handled? 24. Whether the accounts will be kept on a cash or accrual basis, and if on the cash basis, the method of compensating the partner who withdrew or retired for income realized on services rendered, but not invoiced at the time of their withdrawal or retirement. 25. The fiscal year of the partnership. 26. Whether or not interest is to be paid on the partners’ debit or credit balances in the partners’ accounts. 27. Where the partnership cash is to be deposited and who may sign checks. 28. Whether or not all partners shall have access to the Books of Account. 29. Under what circumstances limited partners may be accepted into the firm, and, if so, who shall be designated as the general or managing partner. 30. Prohibition of partners pledging, selling, hypothecating, or in any manner transferring their interest in the partnership except to other partners. 31. Identification of any material contracts or agreements affecting the liability of operation of the partnership. 12

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