Legal structures for a four-person partnership?
October 15, 2018 6:37 PM Subscribe
I’m researching what legal structure to use for starting a business with other people. We are in California. We may move to another state within the next couple of years. The business is service-based and we would also like to accept donations.
There are currently four people who will be bringing in money, who I would trust with the bank account. I guess these are my business partners, and I guess we are the owners? We also have two people who we want to pay to provide support services. We may want to add a couple more people to each of these categories over the next couple years.
Am I leaving out important moving pieces from the description above?
Is what I’m describing above specialized or a pretty turnkey thing?
Does any of this make sense to do on our own?
Would I ideally talk to a lawyer and an accountant? Should I look for “small business” lawyers and accountants?
What decisions should we or can we make before talking to these professionals if these can be known in advance?
Does any of this sound stupid?
Is there anything I should think about regarding how us owners/partners can protect each other from ourselves? Like buyout agreement type stuff? We are very careful and cordial with each other, and we can work out disagreements well, but I hear there’s always a chance of things turning out ugly. This may be lawyer-land.
There are currently four people who will be bringing in money, who I would trust with the bank account. I guess these are my business partners, and I guess we are the owners? We also have two people who we want to pay to provide support services. We may want to add a couple more people to each of these categories over the next couple years.
Am I leaving out important moving pieces from the description above?
Is what I’m describing above specialized or a pretty turnkey thing?
Does any of this make sense to do on our own?
Would I ideally talk to a lawyer and an accountant? Should I look for “small business” lawyers and accountants?
What decisions should we or can we make before talking to these professionals if these can be known in advance?
Does any of this sound stupid?
Is there anything I should think about regarding how us owners/partners can protect each other from ourselves? Like buyout agreement type stuff? We are very careful and cordial with each other, and we can work out disagreements well, but I hear there’s always a chance of things turning out ugly. This may be lawyer-land.
You are starting a small business. You might want to start by just googling "structure for small business" to read up and get an idea of your options. Then you will need to consult a lawyer who specializes in start-ups and small businesses. But, since lawyers cost money, you will get better value for the time if you have a clearer idea of what you are trying to do, how the partners want to interact over time and what growth might look like.
posted by metahawk at 8:23 PM on October 15, 2018
posted by metahawk at 8:23 PM on October 15, 2018
Am I leaving out important moving pieces from the description above?
If you can clarify what you mean by donations (money? stuff? both?) that would be helpful. Note that only non-profits can accept donations and provide a tax write off to the giver. If you are a for-profit company, the IRS classes these as gifts and the giver cannot take a tax deduction. Although there are certain for-profits that do receive 'donations', this is not really the norm as there is no correlating incentive in the form of a deduction. Usually when people give a for-profit money they are investing in it and will expect an ROI.
Is what I’m describing above specialized or a pretty turnkey thing? This sounds like a very standard business set up. If you all want to be joint owners you can set up an LLC, an S-Corporation, or a C-Corporation. Each has a slightly different level of liability protection and how profits are taxed. Only C-Corps can be publicly traded. However, if you want to set up a non-profit, you can either set up your own 501c3 or get a fiscal sponsor (highly recommended if you are just starting out, as 501c3s can be tricky to manage if you don't have a lawyer on retainer). The fiscal sponsor acts as an umbrella company, and you use their EIN and set up a DBA.
Does any of this make sense to do on our own? Maybe? It depends on what type of business structure you want to create, and how much research you are willing to do. The actual set up is fairly simple and can be done mostly online -- you don't need a third party to do this for you. However, I highly recommend that if you are unfamiliar with how corporate taxes work you should talk to an accountant to make sure you understand it.
Would I ideally talk to a lawyer and an accountant? Should I look for “small business” lawyers and accountants? Ideally, yes. Eventually. Do some research on your own first so you're not going in unprepared. Once you've learned a bit more about this, I would start with an accountant, and if you have questions they can't answer, find a lawyer. Any accountant will be able to help you, but yes, you'll need to look for a lawyer that specializes in business law.
What decisions should we or can we make before talking to these professionals if these can be known in advance? Again, you'll need to research these different business set ups. An accountant or lawyer can fill you in on the details, and help you decide what structure is best, but it is a good idea to learn about the different business types before you go in, so you're not paying them to explain it all to you from the ground up.
Does any of this sound stupid? No, not really, mostly it sounds like you just need to do more research. It also sounds like you are unsure of how you all fit into a business together. Do all of you want to be joint owners? Do you have a clear internal structure for who handles what?
Is there anything I should think about regarding how us owners/partners can protect each other from ourselves? Like buyout agreement type stuff? This is what by-laws are for. Go look up some by-law templates / examples and you'll see what I mean. If you find one that meets all of your needs, you don't necessarily need a lawyer to vet it, but it would be remiss of me to tell you that you don't need one to double check everything, especially if this is your first business venture.
posted by ananci at 8:34 PM on October 15, 2018 [2 favorites]
If you can clarify what you mean by donations (money? stuff? both?) that would be helpful. Note that only non-profits can accept donations and provide a tax write off to the giver. If you are a for-profit company, the IRS classes these as gifts and the giver cannot take a tax deduction. Although there are certain for-profits that do receive 'donations', this is not really the norm as there is no correlating incentive in the form of a deduction. Usually when people give a for-profit money they are investing in it and will expect an ROI.
Is what I’m describing above specialized or a pretty turnkey thing? This sounds like a very standard business set up. If you all want to be joint owners you can set up an LLC, an S-Corporation, or a C-Corporation. Each has a slightly different level of liability protection and how profits are taxed. Only C-Corps can be publicly traded. However, if you want to set up a non-profit, you can either set up your own 501c3 or get a fiscal sponsor (highly recommended if you are just starting out, as 501c3s can be tricky to manage if you don't have a lawyer on retainer). The fiscal sponsor acts as an umbrella company, and you use their EIN and set up a DBA.
Does any of this make sense to do on our own? Maybe? It depends on what type of business structure you want to create, and how much research you are willing to do. The actual set up is fairly simple and can be done mostly online -- you don't need a third party to do this for you. However, I highly recommend that if you are unfamiliar with how corporate taxes work you should talk to an accountant to make sure you understand it.
Would I ideally talk to a lawyer and an accountant? Should I look for “small business” lawyers and accountants? Ideally, yes. Eventually. Do some research on your own first so you're not going in unprepared. Once you've learned a bit more about this, I would start with an accountant, and if you have questions they can't answer, find a lawyer. Any accountant will be able to help you, but yes, you'll need to look for a lawyer that specializes in business law.
What decisions should we or can we make before talking to these professionals if these can be known in advance? Again, you'll need to research these different business set ups. An accountant or lawyer can fill you in on the details, and help you decide what structure is best, but it is a good idea to learn about the different business types before you go in, so you're not paying them to explain it all to you from the ground up.
Does any of this sound stupid? No, not really, mostly it sounds like you just need to do more research. It also sounds like you are unsure of how you all fit into a business together. Do all of you want to be joint owners? Do you have a clear internal structure for who handles what?
Is there anything I should think about regarding how us owners/partners can protect each other from ourselves? Like buyout agreement type stuff? This is what by-laws are for. Go look up some by-law templates / examples and you'll see what I mean. If you find one that meets all of your needs, you don't necessarily need a lawyer to vet it, but it would be remiss of me to tell you that you don't need one to double check everything, especially if this is your first business venture.
posted by ananci at 8:34 PM on October 15, 2018 [2 favorites]
Quick and dirty answer.
1. Consult a lawyer.
You will generally be fine with an LLC for a 4 person partnership. S & C corps can also work but have different and more rigorous terms of governance. A lawyer will walk you through these.
For tax purposes an LLC is pass through so taxes end up on your personal income tax based on the corporations profits. An LLC Can file as an S-Corp and save a bit on taxes though generally not too much. An accountant will help
With this once you know your corporate structure.
So start with a 1-2 hour session with an attorney to outline your situation. Pick your structure based on their advice, then get an accountant to manage your books and corporate taxes. If you’re an LLC tax payments will end up as your individual tax liabilities and your own personal tax preparer/accountant can help
With managing that tax burden.
As stated above the corporation bylaws are what governs things like buy outs and contributions from members. It’s really the primary lawyering you need at the start and is the trickiest and most risky part of the whole thing. The smart but expensive way to do this is for each member to have their own attorney at this point. There is no good way to do this if you are all inexperienced at it but you should just rely on the fact that everyone should be held to the same standards.
posted by bitdamaged at 9:26 PM on October 15, 2018 [1 favorite]
1. Consult a lawyer.
You will generally be fine with an LLC for a 4 person partnership. S & C corps can also work but have different and more rigorous terms of governance. A lawyer will walk you through these.
For tax purposes an LLC is pass through so taxes end up on your personal income tax based on the corporations profits. An LLC Can file as an S-Corp and save a bit on taxes though generally not too much. An accountant will help
With this once you know your corporate structure.
So start with a 1-2 hour session with an attorney to outline your situation. Pick your structure based on their advice, then get an accountant to manage your books and corporate taxes. If you’re an LLC tax payments will end up as your individual tax liabilities and your own personal tax preparer/accountant can help
With managing that tax burden.
As stated above the corporation bylaws are what governs things like buy outs and contributions from members. It’s really the primary lawyering you need at the start and is the trickiest and most risky part of the whole thing. The smart but expensive way to do this is for each member to have their own attorney at this point. There is no good way to do this if you are all inexperienced at it but you should just rely on the fact that everyone should be held to the same standards.
posted by bitdamaged at 9:26 PM on October 15, 2018 [1 favorite]
Is there anything I should think about regarding how us owners/partners can protect each other from ourselves? Like buyout agreement type stuff?
Closely-held corporations are notorious for shenanigans, as the courts will generally enforce any stupid thing the owners agree to in the incorporation documents, even if it works out unfairly in practice/over the long term. For this reason, it's good to consult a good lawyer.
BTW, if you are all owners of an LLC or S-corp, you will not be "partners," per se. Corporations and partnerships are different kettles of fish.
posted by praemunire at 10:17 PM on October 15, 2018
Closely-held corporations are notorious for shenanigans, as the courts will generally enforce any stupid thing the owners agree to in the incorporation documents, even if it works out unfairly in practice/over the long term. For this reason, it's good to consult a good lawyer.
BTW, if you are all owners of an LLC or S-corp, you will not be "partners," per se. Corporations and partnerships are different kettles of fish.
posted by praemunire at 10:17 PM on October 15, 2018
People are avoiding incorporating in California because (one reason) they have an $800 annual fee as opposed to, say, Idaho, which is $15, I think. A lot of people forget to do it and there are fines...
If you incorporate in another state you will need a resident agent until you move there. I don't know what resident agents are charging these days.
posted by cda at 10:39 PM on October 15, 2018 [1 favorite]
If you incorporate in another state you will need a resident agent until you move there. I don't know what resident agents are charging these days.
posted by cda at 10:39 PM on October 15, 2018 [1 favorite]
The Nolo Press book on the topic is a great overview of the choices available and the basics of what is involved in each. (They also have books dedicated to different entity types that go into all the gory details if you need/want that)
If it's going to be more than a hobby project, I wouldn't recommend relying solely on the books. However, they will help you understand enough to find a good professional and use their time more efficiently by not making them your teacher or waste time explaining why this thing that seems like a great idea when you don't know what you're talking about is actually a terrible idea, thus keeping your initial expense low.
posted by wierdo at 11:34 PM on October 15, 2018
If it's going to be more than a hobby project, I wouldn't recommend relying solely on the books. However, they will help you understand enough to find a good professional and use their time more efficiently by not making them your teacher or waste time explaining why this thing that seems like a great idea when you don't know what you're talking about is actually a terrible idea, thus keeping your initial expense low.
posted by wierdo at 11:34 PM on October 15, 2018
I cannot emphasize enough that you should talk to a lawyer. Ideally this would be a lawyer who specializes in small businesses, yes.
I do not think you need to do extensive research before speaking to a lawyer. Trying to figure out the business structure ahead of time will be inefficient and may lead you astray - what if you go in saying you want a partnership where another structure would have been better suited? A good lawyer would guide you to a better path but some lawyers will simply work within the scope of what you ask them to do.
What you should do ahead of meeting with a lawyer, then, is figure out what exactly your priorities are, how you want to share profits, how you see the business being run, etc.
Do not assume relationships with business partners will remain cordial. This isn't to scare you - just, it doesn't hurt to plan for a slim possibility. Furthermore, clearly laid out rights and obligations mean less chance of a disagreement in future.
Please rely on a lawyer, not an accountant, to draft documents, although talking to an accountant about setting up accounts etc is a good idea. Sorry if that seems obvious.
(Disclaimer: I am a lawyer and may be biased because I've seen so many disputes/problems where people have tried to do things on their own)
posted by ersatzhuman at 6:00 AM on October 16, 2018 [2 favorites]
I do not think you need to do extensive research before speaking to a lawyer. Trying to figure out the business structure ahead of time will be inefficient and may lead you astray - what if you go in saying you want a partnership where another structure would have been better suited? A good lawyer would guide you to a better path but some lawyers will simply work within the scope of what you ask them to do.
What you should do ahead of meeting with a lawyer, then, is figure out what exactly your priorities are, how you want to share profits, how you see the business being run, etc.
Do not assume relationships with business partners will remain cordial. This isn't to scare you - just, it doesn't hurt to plan for a slim possibility. Furthermore, clearly laid out rights and obligations mean less chance of a disagreement in future.
Please rely on a lawyer, not an accountant, to draft documents, although talking to an accountant about setting up accounts etc is a good idea. Sorry if that seems obvious.
(Disclaimer: I am a lawyer and may be biased because I've seen so many disputes/problems where people have tried to do things on their own)
posted by ersatzhuman at 6:00 AM on October 16, 2018 [2 favorites]
Before consulting a lawyer (assuming that funds are tight enough that you can't waste a few hours of lawyer time trying to understand the vocabulary), browse nolo.com for articles related to small businesses, and consider getting one or more of their books.
Expect 80% of the book to be irrelevant to you. The other 20% will be gold. (Eventually, more of that 80% will be useful, but at first, most of the book will be too obscure.) As mentioned, you don't need to do heavy research before consulting a lawyer; this is the "here's the site to browse around and see if it tells you what questions you'll need to ask."
When you have a moderately solid idea of how you want things to run - who has authority to make money decisions; who else has access to the accounts; how differences of opinion will be settled; what happens if someone wants to leave; how long the business is expected to last - go find a lawyer. You may wind up reworking those ideas, but you'll have something to start from.
How long: Do the four of you expect to be doing this for the next 20 years? The next 50? Or "three years, and then we'll see how it's going?" A business plan for 3-5 years can assume that people will remain friendly (although it should be prepared for otherwise); a plan for 20 years needs to allow for the founders to get married, get divorced, move to another state, and so on. You don't need to write up the plan; you need the rough idea of what structure will allow for the plan to function.
posted by ErisLordFreedom at 4:17 PM on October 16, 2018 [2 favorites]
Expect 80% of the book to be irrelevant to you. The other 20% will be gold. (Eventually, more of that 80% will be useful, but at first, most of the book will be too obscure.) As mentioned, you don't need to do heavy research before consulting a lawyer; this is the "here's the site to browse around and see if it tells you what questions you'll need to ask."
When you have a moderately solid idea of how you want things to run - who has authority to make money decisions; who else has access to the accounts; how differences of opinion will be settled; what happens if someone wants to leave; how long the business is expected to last - go find a lawyer. You may wind up reworking those ideas, but you'll have something to start from.
How long: Do the four of you expect to be doing this for the next 20 years? The next 50? Or "three years, and then we'll see how it's going?" A business plan for 3-5 years can assume that people will remain friendly (although it should be prepared for otherwise); a plan for 20 years needs to allow for the founders to get married, get divorced, move to another state, and so on. You don't need to write up the plan; you need the rough idea of what structure will allow for the plan to function.
posted by ErisLordFreedom at 4:17 PM on October 16, 2018 [2 favorites]
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posted by zachlipton at 7:37 PM on October 15, 2018