How To Structure a Partnership Legally?

[RMcdonald]

Hi Guys,

Hope everyone is doing great!

I just wanted to gain a little more insight on how people work together on sites and whether you set agreements in place before starting? Such as a legal document stating each parties roles, requirements and profit share?

I'm asking due to a friend of mine asking if we could start an affiliate site together and split the earnings, I wouldn't want to do anything that would offend them of course! So not sure if having a legal document is great, but I have been burnt before in past partnerships.

Sorry if this isn't in the right area, thought this would be the ideal place.

Thanks guys!

 

[eliquid]

Set up a LLC or some other structure ( s-corp, c-corp, etc ).

In the company setup, you will own X shares, they will own X shares of the company. You can make this 50-50 or 49-51, w/e.

In the operating agreement of the LLC ( or other setup ) you will spell out who does what, who owns what, what happens on dissolution, etc.

It's pretty basic and you can have whatever you want.

Just have an attorney go over it when done and be someone who validated you 2 agreed on it.

The operating agreement is the most important document.

.

 

[RMcdonald]

Hi @eliquid,

I don't want to go as far as setting up a LLC/LTD company, as we are going to be creating a single site together.

I think the best route would be to maybe have a solicitor/lawyer draw up an agreement that we both sign and then the solicitor/lawyer signs as a witness.

Been through the whole legality of leaving a partnership when a LLC/LTD company is involved.

 

[becool]

Hi @eliquid,

I don't want to go as far as setting up a LLC/LTD company, as we are going to be creating a single site together.

I think the best route would be to maybe have a solicitor/lawyer draw up an agreement that we both sign and then the solicitor/lawyer signs as a witness.

Been through the whole legality of leaving a partnership when a LLC/LTD company is involved.

This really depends on your locale and @eliquid's response above is, from my vantage, United States-specific, although it may apply to your locale (which is probably not the United States, given your use of the term “solicitor”). A contract, as you’ve suggested, could cut it, but you lose the benefits a fictitious entity would otherwise provide. The corporate entities @eliquid referred to provide organizational advantages as well as the potential for limiting the liability of the individual officers/members (i.e. you and your partner), subject to your location and the applicable laws that govern this sort of thing (which I am probably not versed in).

Generally speaking, forming a corporate entity in the United States can be accomplished relatively cheaply and attorneys who provide the services delineated above by @eliquid are readily available to help fashion a corporate entity. There are also several companies that provide this kind of service in the United States, like this one.

Having that said, I wouldn’t be surprised if the cost of having an attorney draft a coherent and adequate document to cover your marketing of an affiliate website exceeds the cost of forming a corporate entity because you’d have to find a guy or gal who knows what the hell you’re talking about (which means the lawyer’s going to be specialized in affiliate sites/cyber stuff and probably charges a premium) or you’re going to need to bring the attorney up to speed on affiliate sites (which would probably take time and money). I’m just thinking out loud here, and don’t know one way or the other, but thought I’d add my thoughts. Maybe the best advice is to speak briefly with an attorney regarding the best course of action (i.e. corporate entity, contract or some other approach). Good luck with whatever you decide to do.

 

[CCarter]

If you aren't willing to form a corporation then this isn't a serious business. What's the point?

If you aren't willing to create a corporation - how do you make money? Where do the checks go? And are you going to be liable for the taxes when things take off? It sounds flaky from the beginning if you guys aren't willing to do a full corp with bank accounts and agreements. What's the likelihood that operation is going to go anywhere? And it's more telling if your friend isn't willing to do that - cause that means he's not really serious either.

Also doing anything with family or friends will end up straining the relationship IF you do not have everything written down on who is responsible for what. This person might simply want to partner with you and expect you to do all the work. So it's imperative that you established each other's roles and responsibilities, and what happens if one of you is lacking in their role.

FUCK offending them - it's your valuable time and expertise you are bringing to the table. If they slack off you wasted your time - time you cannot get back. So think less of offending them and more about taking this seriously.

And you've been burnt in the past - we all have. I think the one thing we can all agree on is that you are less likely to get burnt and screwed over when everyone understand their roles, responsibilities, and there is no "vagueness". The last thing you want is to have your partner take out $50k out of your business account without explanation and that they'll "pay back", leaving you feeling like shit, cause that's your friend, and now you are being screwed over again - all you needed was to have solid understanding in the beginning on how things go.

I can think of a thousand scenarios where things can go wrong and most can be solved by having an operating agreement in place and an understanding of everyone's roles.

 

[TopHat]

eliquid, becool & CCarter pretty much covered it... My experience has led me toward more incorporation rather than less. In a 2 person parntership (US based), I found the best structure from a tax & liability standpoint to be an LLC shell owned by two individual S-Corps. It offers the combined liability protection of an LLC and the flow-thru tax advantages of an S-Corp.

An LLC is designed to protect you from outside predators, but if those predators exist within, even an S-Corp won't help you much, its just a tax boon.

As CCarter advised -- choose partners wisely. And as popular wisdom goes: "Trust in God but tie up your camels".

 

[eliquid]

I agree with @TopHat

From my recent research, LLC owned by S-corp. But that has been through research of work and advice pushed out the last 10 years.

Upcoming tax laws have been and will continue to, change.

Some people are pushing to c-corps now because of the tax law change, but it depends on your business use and money flow.

You need to determine your end goal to make sure, and then check up on whats changed.

However the foundation is very clear, the LLC is something you should look at. How it is owned could be the next step for you ( S-corp or not )

.

 

[TopHat]

Some people are pushing to c-corps now because of the tax law change, but it depends on your business use and money flow.

I think that has to do with the new tax law disallowing retained earnings in US-owned foreign-operated "C" corporations. S-Corps have always been pass-thru insofar as earnings (avoiding double taxation) but didn't offer many of the liability protections and other perks of C-Corps.

With the new law making US-owned foreign-operated C-corps "pass-thru", they make C's just like S's, only now C's have more benefits and there can't be "double taxation" on earnings, as they can no longer be retained.

I may be wrong on that, but that's my interpretation.