You may be thinking of growing your San Diego business by adding another co-owner. Maybe this person will bring needed resources to the business, or has the connections, skills, or knowledge to boost or expand your business.
You’re probably cautious about who to bring in as a co-owner, and you might not be sure of what criteria to focus on. Professional consultant Mary Abbajay writes in her blog about “The Partnership Paradox: How to Choose a Business Partner.” She suggests that you first look at yourself, because this will help you identify the things you need in a business partner. This includes examining your own goals, strengths, and weaknesses. Abbajay then suggests a few more questions to ask, including:
● Will this person be able to invest financially in your business, now and in the long term?
● What types of benefits will this person likely bring (or not bring) to your business?
● What kind of network does he or she have?
● Does this person share your work ethic?
If you do decide to add another co-owner, make a smart decision for your business by first looking into the many legal and tax issues that can affect you. For example, here are just a few more things that will also play a role in your decision to add a business co-owner:
1. The law sometimes limits co-ownership
Under California law, you can’t always bring in a new co-owner. For example, if you’re in a professional corporation, the law generally requires that every co-owner be licensed in the profession. Sometimes, California licensed professionals can join your business as co-owners even if their license isn’t in your specific profession (such as in a professional medical corporation). In these very limited situations, exact legal requirements must be met. But in most cases, only licensed professionals in your same field can be co-owners in a professional corporation.
2. Get your agreement in writing
A written agreement is required for many businesses. You may already have a written agreement, so make sure you follow any rules in that agreement about adding new owners.
Partnership agreements, operating agreements, and shareholder agreements are all examples of written contracts between you and the other co-owners. This agreement is your opportunity to create a strong business relationship with your new business partner, and detail your business expectations and responsibilities.
Never depend on vague oral agreements. Your business is too important, and the risk of misunderstandings that can damage your business is too great. Here are a few terms to discuss with each other and then include in your agreement:
● Set out the ownership shares, purchase price to buy into the business, and the payment terms.
● Decide if the new co-owner will only be an investor, or also work for the business and be paid a salary.
● Clarify everyone’s rights and responsibilities in the business (including day-to-day management and decision making roles).
● Agree on how profits and losses will be divided.
● Create an exit strategy. Usually, this includes a “buy-sell agreement” that’s used in case someone leaves the business later. Without a buy-sell (or “buyout”) agreement, you could get stuck with someone you don’t want for a business partner.
3. Look carefully at how your business is set up
There are many different business structures, and not all are created equal. The most common business forms are:
● Sole Proprietorships (a business owned by a single person),
● Partnerships (including “limited” and “general” partnerships),
● Limited Liability Companies (LLCs), and
● Corporations (including S-chapter corporations and professional corporations).
If you decide to bring in a new co-owner, you may need to change your business structure to address the changing tax and legal issues for you and the incoming owner. Keep in mind that your options can be limited by California law depending on the type of business you run.
Some of these business structures provide zero protection for a business owner’s personal assets. This means money and property in your personal name can be subject to business debts. Business structures like LLCs and corporations can help avoid this personal liability.
We’ll help you weigh the benefits and drawbacks of each. In any case, don’t wait to change your business structure after it’s too late to protect your personal assets.
Contact your lawyer at San Diego Law Firm for guidance when you expand your business’s ownership circle. Do your part now to set things up right, because a few simple steps can often help you avoid headache and expense later. Call San Diego Law Firm’s business lawyers at (619) 794-0243.
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