Friday, June 8, 2012
As you can see my three dogs were able to come to an agreement about sharing the tiny bed. If only it was always this easy for people to agree and work together. Frequently we fall into business with friends and family. Most experts would recommend against this idea. The reality is people do not always agree especially friends and family. Since I know advising against doing business with people you enjoy will be ignored I will tell you how to make it work. The key is communication. A partnership agreement is just a document that reflect the conversations you have had and the decisions you have made about your business. Every partnership must have an agreement in writing. The simple task of putting your agreement into writing ensures that there is a clear understanding of your agreement. This clear understanding will help avoid most of the common problems partners encounter. The document itself can be very simple or excruciatingly detailed. Either is fine as long as all the questions about the business are answered. The purpose of a partnership agreement is to avoid conflict.
The following is a list of some of the questions you and your partner must answer. You will have to add more items to meet all the specific details of your business. Be complete. This is just a start for you to get the ball rolling.
Who owns what?
What are my responsibilities?
What are the responsibilities of the other partners?
How will profits be shared?
How will taxes be paid?
Who will pay the bills?
What type of bookkeeping will we use?
What if I decide I do not want to do this any longer?
If I quit is the business dead? Who keeps the name?
What if I get hurt? What if I can no longer do my part?
What if someone dies?
If we disagree who has final say?
How will vacations work?
Who can sign a contract?
Who has access to bank accounts?
How are decisions made?
Can one partner sell their share?
How do we wind down and close the business?
These are just a few of the questions you and your business partner need to discuss. Include everything in your partnership agreement. Of course if everyone agrees you can change the agreement later. If there is anything you do not understand in the partnership agreement you create you must hire an attorney before you sign the document. A partnership agreement is a contract and should not be taken lightly. There is just one rule you must follow with contracts. Never sign any document you do not understand.
Next week we will discuss your risk factors and talk about doing a liability assessment.
Saturday, June 2, 2012
As I was setting up to be a vendor tonight at the Create Mixed Media Retreat I was looking around the room admiring all the amazing art that was being unpacked. Somewhere in the back of my mind a little voice was asking whether they were incorporated or a LLC or perhaps a sole proprietor? Sorry, my mind just wanders off into legal land sometimes. I would have loved to take a poll of the artists and vendors to ask what type of legal business structure they had chosen. I would be willing to bet that many of those selling there wares had not made a choice but had simply begun operating as a sole proprietor.
It is important that you choose the type of business entity you will be running. One word sums it up nicely LIABILITY. You choose the type of business to form based on two factors: tax liability and personal liability. Tax liability is simply the amount you will have to pay the IRS in income taxes. (You should have learned about this from your visit with a CPA. It is not too late- go see a CPA for tax advice.) The second type of liability is personal liability which simply put is what assets creditors (those the business owes money to) can get from you and what can you be sued for if someone is injured.
As a sole proprietor you have zero protection. This means that your personal assets like your car and home are not protected from creditors or law suits. This is really important especially if you teach classes where there is the possibility of an injury. You might be able to purchase insurance to cover these potential issues and I would encourage you to look into liability insurance. The good news for a sole proprietor is that your business earnings just go right onto your personal income taxes. Easy!
A LLC stands for a limited liability company. This type of business for allows you some protection in limiting your liability. It is the most common type of business for recommended by professionals like CPA'S and attorneys. The paperwork is simple as is the book keeping. You can have business partners too. Talk to your insurance agent about having liability insurance for your business. The information is free and a policy could be very affordable! Taxes are slightly more complex here but manageable.
Of course you could just go for it and incorporate! This costs money in state fees and requires annual document submissions to the state and record keeping. Go to CA.gov for loads more informaion. Use the California government websites to give you an idea what you need to do to incorporate and what type of business for is right for you!
Spend some time researching your options and keep in mind that you can always change your business form! We are working our way through the checklist and next week I want to spend some time talking about partnerships and having a partnership agreement.
Feel free to ask questions and I will do my best to point you in the right direction!