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Chris LoCurto

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September 12, 2013

Structuring a Partnership Without Partnering – Q&A Series

September 12, 2013 | By | 8 Comments

I coach entrepreneurs and small business owners on how to structure their businesses every week. Todays question from Erick is one I get often:

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The 5 D’s are death, disaster, disability, divorce and disagreement but I’ve got a 6th. Don’t. Don’t do it. Don’t even think about it. Business partnerships don’t work and today’s Q&A Series video explains why.

 

Question: What are your creative ways of incentivizing non-partners?

  • Paul Christiansen

    I generally agree that a partnership is to be avoided in principle. They rarely work out as expected, but I think it’s due in large part to poor planning.

    The strategy of paying someone “as if” they were a partner is not the same as being partner. It may placate them or satisfy them temporarily, but a partnership without ownership is not a partnership.

    The biggest problem in a 50-50 partnership comes if there is a disagreement. There is no way to avoid deadlock. Strategies to avoid this are numerous. One way is for each partner to take a year as a 51% partner and then alternate back. This keeps things headed toward consensus but there is a built in tie breaker should things get dicey. Another way is to have three partners. The odd partner could be a 1/3 partner or even a 1% partner. Just a way to break deadlocks.

    You didn’t explicitly say it, but partnerships should never be actual partnerships, they should be corporations or LLCs.

    The last business I had was a 50-50 ownership company and true to form, it didn’t work out – our values were just too different.

    I’m agreeing with your principle of “don’t do it”, but for those that insist, (and it can work in rare cases), always start at the end – what do we do WHEN this partnership breaks up. Incorporate that into the founding documents and hope for the best! Then at least there’s a fighting chance.

  • Dale Powers

    Would you say “don’t” in traditional partnership industries, such as a legal practice or architectural firm? In most of those cases, though, there IS a majority shareholder (ultimate decision-maker). How would they implement that seismic of a shift of culture?

  • http://www.qualitylivingmadesimple.com/ Joshua Rivers

    Thanks, Chris. You should have armor and a sword when talking about 2-headed dragons! :)

  • http://www.pauljolicoeur.com/ Paul Jolicoeur

    Very well explained. When everything is clear and well laid out, you clear the path of most issues that might take your attention away from actually doing the business you set out to do.

  • http://www.mattmcwilliams.com/ Matt McWilliams

    Hey Chris,

    Prior to this video, I completely disagreed with you on this and would cite hundreds of examples of where it worked.

    So my question involves getting very specific about compensation.

    This actually might be relevant soon, which is why I ask.

    Let’s say we have persons A and B. They want to go 50/50.

    They decide A will be the 100% shareholder but B has a contract to make an amount equal to that of A for the duration of his employment with A. There is also a fair exit package based on time with the company and value of the company, etc.

    As the owner, A gets paid a salary, but also takes dividends.

    Let’s say the salary is $100,000 and the dividends are $50,000. Total compensation is $50,000.

    However, dividends are taxed differently.

    So my question is, how do you address that? Do you just write it up so that the net income for both ends up equal?

    Thanks Chris!

  • http://www.davebratcher.com/ Dave Bratcher

    This is a great answer to a commonly asked question, but it is often only answered by simply saying, “Don’t do it.” Thank you for explaining how to get the same effect without the downside risk. Thanks for all the great information you continue to provide.

  • thatothermatt

    Any advice on the best way to get out of a partnership while still keeping everything running smoothly. One partner is currently (but not officially) the one making the final decisions, but roles may need to be reversed in order to keep peace.

    • Kenny

      @thatothermatt, You might try the old “one-cuts-the-other-chooses” approach kids use to split cake or candy bars. Have one partner draft a buy-out agreement and the other partner choose if he wants to be the buyer or the seller. To take Chris’ approach (which is awesome!), have the buy-out include how the seller will be compensated like a partner after the transaction. Good luck!