Taking on partner(s) and limiting our liabilites

5 Replies

Hi BP members,

I will be taking on a partner in an upcoming deal and am looking for advice on how to structure the partnership where we are protected from each other.

Our concerns are that we both have things we are involved in outside of this upcoming deal. We both own property and businesses that we are not partners with each other in. What we want to avoid is having a legal issue with one of our individually owned ventures that a judge or lawyer could tie in to our jointly owned property.

Is this even possible and if so how would it be done?

I would make sure to get a consultation with an attorney. Key to a good partnership agreement is discussing lot of things in advance, like death/disability of a partner, dispute resolution, roles, profit distribution, etc. This are very basic things but depending on your particular situation, your assets, relationship with your partner,etc there are more things that an attorney shed some light on. 

Originally posted by @Chris Mackey :

Hi BP members,

I will be taking on a partner in an upcoming deal and am looking for advice on how to structure the partnership where we are protected from each other.

Our concerns are that we both have things we are involved in outside of this upcoming deal. We both own property and businesses that we are not partners with each other in. What we want to avoid is having a legal issue with one of our individually owned ventures that a judge or lawyer could tie in to our jointly owned property.

Is this even possible and if so how would it be done?

This is very normal Chris. 

What you might wanna do is conduct your deal via a seperate entity that you both are partner/shareholder of.  You have to make sure that the entity is treated as a separate entity and you are not piercing the corporate veil. 

To get the desired asset protection via entity, you need to treat LLC/Scorp as a separate entity. Don't pierce the corporate Veil:

  1. This can occur if the entity either is poorly capitalized. Inadequate Initial funding of the entity.
  2. or fails to maintain a separate identity from its owners ( using the business bank account for business purchases, maintaining separate books)
  3. Conversion of entities Assets for Personal Benefit:
  4. Another factor that poses a risk of piercing the corporate veil is the draining of entities assets (such as payments of large salaries to shareholder-employees) that leaves the entity with inadequate resources to pay its debts.
  5. Do not commingle personal and entities assets.
  6. Maintain a separate entities bank account.
  7. Execute an operating agreement.
  8. Follow the provisions of an operating agreement.
  9. Have LLC member meetings according to the operating agreement or board meeting for S-corp
  10. Title property in the name of the entity.
  11. Maintain insurance on property in the entities name.
  12. Sign all entities documents in the entities name, not the members' names.

These steps will also provide a better defense against other creditors attempting to pierce the LLC veil.

You might want to spend few hundred dollars if you are stressed about this and get a lawyer to set you up with correct entities. 

@Chris Mackey

For prospective partnerships, its usually a good idea to consult with an attorney who can help you draft an operating agreement. The OA should cover how to handle the "what if'" scenarios. 

Partnerships and joint ventures are tricky. So, my first suggestion is...don't do it. 

If you decide to proceed, I think you should have an LLC formed going in a limited partnership with your(s) partner(s) LLC. There are so many areas where things can go wrong with a simple partnership, and you want to be protected from an asset protection perspective. I can provide you with more info on that and give you a referral to a good attorney specializing in asset protection and partnership structuring.

Before proceeding, I suggest to have all or most of following questions clarified:

Joint Ventures – checklist / questionnaire

Before you can start to set up the legal framework, there are various issues that need to be addressed. These can be summarised as follows:

  1. What are the objectives of the joint venture?
    • general trading principles
    • what will the business actually be doing
  2. Who puts what in?
    • cash
    • other assets
    • services
    • are any existing contracts of either to be taken over by the joint venture
    • who actually does / will do what
  3. Will any external funding be needed?
    • who will it be raised from
    • who will borrow it
    • who will guarantee it
  4. Who gets what out?
    • sharing of revenue profits or losses
    • sharing of capital gains or losses
    • is any payment to be made to either other than as share of profits, eg for ongoing services
    • will the participants be operating a ‘salary/dividend split’ – ie taking their month by month requirements by way of low salary, balance as dividends?
    • What, otherwise, will be the policy in relation to dividends – to what extent is it intended to distribute / retain surplus profits?
  5. Who controls what?
    • responsibilities for day to day running, in all relevant areas of activity
    • tactical decision making (day to day)
    • strategic decision making (longer term policies)
    • what things can only happen if both parties agree
    • what will happen if you can't reach agreement on some major issue - ie deadlock
  6. What happens if either party 'wants out'?
    • on what kind of notice will this be permitted
    • does the other have 'first refusal' to take over the whole venture? - if so, on any favourable terms?
  7. To what extent will the parties be free to carry on other businesses
    • while the joint venture subsists
    • if one party pulls out
  8. Is it intended that spouses/partners should also be shareholders, to allow for tax advantages from a broader split of dividends?
  9. Is there a vision that any others will become shareholders (or be granted grant options to acquire shares) in the company in the future?
    • Who?
      • Staff?
      • Others?
    • On what terms?
      • Participation in dividends?
      • Voting rights?
  10. Are there any offshore angles:
    • Is there potential for overseas sales or operations?
    • Does anyone involved in the venture have any overseas connections?
    • Does anyone involved in the venture have any plans to live overseas in the future?
  11. Is there yet any written:
  12. Is there an ‘exit strategy’? If so, what is it – which of the following most closely hits the mark?
    • ‘lifestyle’ business – ie simply intended to be run by and to provide an ongoing source of work and income for the proprietors, no clear vision for the long term future?
    • possibility of future sale at some point?
    • A core object of the venture is to create an asset with a view to sale or flotation in 5 years?
  13. Which aspects of the above do you feel most important at present? Which aspects concern you most? (NB each of you may have a different view here, the question is asked to help me understand where each of you is coming from) 

Does anyone have a sample operating agreement for review?

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