Author Topic: Business Partners - Love or Hate?  (Read 2274 times)

FatFI2025

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Business Partners - Love or Hate?
« on: April 20, 2019, 11:38:07 AM »
I've convinced my megacorp to let me subcontract through an LLC doing the same professional services I do as a W2 employee. For boring reasons that I won't go into, it will take about 18 months to make this transition happen. We'll probably put together a contract for one base year and nine option years. Megacorp seems open to me bringing in talent that they haven't been able to hire and I need to make a decision whether to make this a solo entrepreneur venture or bring on partners or employees.

On one hand, partners can help balance out my professional weak spots, manage employees, and grow business. It will also reduce the risk of me getting cut during an economic slow down or if future management doesn't like the arrangement. Having partners/employees also means that I could potentially exit day-to-day work in a few years while still pulling in those sweet earnings.

OTOH I'm concerned about the obligation that would come with partners/employees -- if I really start to hate the business I wouldn't be able to walk away. I'm also concerned about profit sharing arrangements that won't cause consternation because I've seen how people overvalue themselves relative to others. Most importantly I want to keep my costs low, and it seems like this could be hard with partners/employees that want certain work perks.

What's your experience with partners/employees vs. solo? More trouble or worth the extra effort?

bwall

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Re: Business Partners - Love or Hate?
« Reply #1 on: April 24, 2019, 07:29:00 AM »
How many clients will your LLC have? If you're in California and your LLC has only one client (Megacorp) and only one employee (you), then the state of California might deem you to be an employee of Megacorp, not your LLC. Even if you have more than one employee but only one client (Megacorp), the state might deem you to be employees of Megacorp.

"Substance over form", or something like that.

Ask your CPA for details.

FatFI2025

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Re: Business Partners - Love or Hate?
« Reply #2 on: April 25, 2019, 05:15:43 PM »
How many clients will your LLC have? If you're in California and your LLC has only one client (Megacorp) and only one employee (you), then the state of California might deem you to be an employee of Megacorp, not your LLC. Even if you have more than one employee but only one client (Megacorp), the state might deem you to be employees of Megacorp.

"Substance over form", or something like that.

Ask your CPA for details.

Thanks @bwall guess this topic isn't very interesting based on the lack of replies. I did some research based on your post and it looks like I might be considered an employee for purposes of wage order claims (ABC guidelines), which wouldn't be a problem since both business entities will be adhering to all of the wage order guidelines. FTB could reclassify me as an employee of megacorp, but I seriously doubt they would go to the trouble since I'll be paying plenty of taxes through the LLC.

I'm meeting a colleague/prospective partner for lunch next week. I guess we can just talk about ideas without making commitments at this point. I'm honestly leaning towards solo just to keep it simple and because of others on this sub-forum complaining about being unhappily trapped by their businesses.

bwall

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Re: Business Partners - Love or Hate?
« Reply #3 on: April 25, 2019, 06:26:49 PM »
As far as business partners go, the one piece of advice I read is that you should know someone for 10 years before you go into business with them. That will give you the time you need to know how this person is in all seasons of life; the good times, the bad times, the in-between times, work ethic, morality when no one else is looking, how do they treat their wife, kids, etc.

My current business partner I knew for 9 and a half years before we teamed up. That was 10 years ago and it's been great---for both of us.

Five years ago we seriously considered making an employee we'd recently hired a partner. Last month we fired him for lack of productivity and should have done it sooner. We have another employee now with us for almost four years. We're considering making this person a partner, but it'll be another couple of years before we do.

maizeman

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Re: Business Partners - Love or Hate?
« Reply #4 on: April 25, 2019, 08:11:16 PM »
With business partners it is critically CRITICALLY important that you have the same long term goals and ideally have similar life stages/financial situations.

People can agree about all the facts on the ground but still disagree about how to proceed based on their own financial situations/goals/risk tolerances.

Conflicts about putting more money into the company to grow faster vs trying to grow organically from revenue, conflicts from "do we take this risk which have a 50% chance of being the end of the company but a 50% chance of making it worth 4x as much.

That doesn't mean don't start a business with partners, but it does mean, like any relationship, talk about all this stuff (even the questions that seem really unlikely "what would you want to do if we got an offer to buy the company for $500k six months after we started? okay what about $3M?") before you're committed.

bwall

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Re: Business Partners - Love or Hate?
« Reply #5 on: April 26, 2019, 04:41:35 AM »
+1 maizeman

All very good (financial) points.

If one partner could take the financial hit if the company went under and for the other it would mean bankruptcy, then of course they are going to view the risk scenario you describe differently. Same thing about potential buy-outs. The wealthier partner might not be motivated by a $3m buyout, whereas the less wealthy one could be extremely interested in such an offer.

Malkynn

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Re: Business Partners - Love or Hate?
« Reply #6 on: April 26, 2019, 04:51:10 AM »
I'm self employed and work alongside the owner of the business. She and I run the place together, she doesn't make a decision without me, and the trust between us is incredible. We are known in our industry as one of the most dynamic pairings ever, as we are radically different in important ways, but nearly identical in our core values.

I LOVE working with her, but I would NEVER partner with her ever, ever, ever. We would kill each other in under a year.

Why? Because as @maizeman said, we have different goals.

FatFI2025

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Re: Business Partners - Love or Hate?
« Reply #7 on: April 26, 2019, 09:26:57 AM »
Thank you @Malkynn @maizeman @bwall I appreciate getting advice from people who have done this before and it's forcing me to think through scenarios.

The potential partner I'm considering is 20 years older but about the same distance from FI. I've known him for just over two years -- he has a great reputation, expertise that I don't, and his teams have been very successful, so there's no doubt he would be valuable.

But your feedback has created some healthy doubt. I already have the deal worked out for me going solo and it could make it messier to bring him as a partner or employee since I still have to negotiate all of the details, not the least of which are billing rates.

maizeman

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Re: Business Partners - Love or Hate?
« Reply #8 on: April 26, 2019, 09:48:39 AM »
Yup in my experience that can be another sticky point: are partners' time worth different amounts to the company/to your clients? I

f you're paying the income of the company out to the partners as salary, great. If you're paying it out as distributions/dividends this can get messy if, say, you own equal percentages of the company, but one partner is able to bill at 2x the rate of the other. (There are work arounds on the legal+financial side, but reasonable people can disagree about how much of the value being paid out is a result of the difference in value-of-time vs the growth/health of the company as a whole.) If you're reinvesting it in the business it gets even trickier.

Also work expectations. Is the expectation that each partner will work an equal number of hours for the company? Or contribute billable hours = the same dollar figure? How do you value time which isn't billable to customers but is just part of the overhead of running a business (meeting with accountants, handling tax and legal filings, etc)?

I don't want it to seem like I'm arguing against ever having partners in a business. Starting a business with a team can be a lot of fun, and in a lot of fields you NEED people with extremely different expertises on your team from day one. These are just some of the weird and unpleasant interactions I've either experienced or seen that I think could have been avoided by discussing and setting lots of clear expectations on day 1.

DapperAndy

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Re: Business Partners - Love or Hate?
« Reply #9 on: April 26, 2019, 02:31:01 PM »
I've had both good and bad experiences. From both long and short term relationships. You're basically getting married and having a baby together. This is why my Startup Weekend partners felt like speed-dating to-marriage, and it was mostly good until it wasn't. This is also why my experiences partnering with friends and family, who I already had close relationships with, lead to unexpected waves that either strengthened the bonds or broke them.

YMMV

As for single-contract LLC's, you'll need to check with your accountant, but I believe that as long as you abide by the IRS ~20 requirements of a 1099 contractor, then you'll not be considered an employee. Things like: do you determine your own hours, the method with which you do the work, etc.

Sounds exciting and challenging - where all the value is :)

FatFI2025

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Re: Business Partners - Love or Hate?
« Reply #10 on: April 28, 2019, 09:54:45 AM »
Yep potential partner is a strong manager and hardcore engineer. I'd be handling all of the corporate ops -- contracts, accounting, regulatory compliance, office, etc.  It's a deal where we bill hourly, so pretty clear how to allocate revenue and costs between partners. By having him on board, we could potentially grow more in his discipline area which is different than mine.

I'm wondering if I offer to take 5% or 10% of his revenues for my efforts plus his share of costs, would that be a fair arrangement? I'm also considering 0%, but then it doesn't really seem worth the effort.

maizeman

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Re: Business Partners - Love or Hate?
« Reply #11 on: April 28, 2019, 10:09:32 AM »
Yep potential partner is a strong manager and hardcore engineer. I'd be handling all of the corporate ops -- contracts, accounting, regulatory compliance, office, etc.  It's a deal where we bill hourly, so pretty clear how to allocate revenue and costs between partners.

Is there any chance you'd bring on additional folks in the future who would also have billable hours but would be employees rather than partners? If so, deciding how would you allocate the company's share of their billable rate is where I could first see things getting sticky with this arrangement.

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By having him on board, we could potentially grow more in his discipline area which is different than mine.

Is there a synergy to having the two of you together? Or in other words, if he is growing his billable hours in his discipline area which isn't yours does it provide any financial or career benefit to you?

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I'm wondering if I offer to take 5% or 10% of his revenues for my efforts plus his share of costs, would that be a fair arrangement? I'm also considering 0%, but then it doesn't really seem worth the effort.

Depends on how much time you're sinking into all the corporate ops stuff. Also, what you and I agree is fair won't necessarily have any relationship to what you and he agree is fair (if you can agree at all). Do talk about this stuff.

The one solid piece of advice I can give here through is: don't get locked into a situation where you are doing support work for your partner for free.

You could take a percent off the top.
You could arrange a guaranteed fixed payment for corporate governance per month or per year.
You guys could both agree to put a fixed percentage of your billables back into the company account which can be used for farming out at much of the work as as possible with the understanding you'll be bringing on a part time operations manager as soon as you bring in at least $X/year.
I'm sure there are other possible arrangements.

People value things that they pay for. If doing the scut work of making an independent company actually function is provided for free, it won't be treated like it is valuable, and over time can lead to resentment and friction.

FatFI2025

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Re: Business Partners - Love or Hate?
« Reply #12 on: May 01, 2019, 08:33:46 PM »
Thank you for the guidance! I chatted with the potential partner and left the door open, but due to complexities with him being at a competitor right now, we decided just to keep in touch as the situation continues to evolve.

After considering your feedback, I think my strategy is to get things flowing with Megacorp solo and expand cautiously or not at all.

A Fella from Stella

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Re: Business Partners - Love or Hate?
« Reply #13 on: August 02, 2019, 12:52:43 PM »
Both my parents had businesses. One felt that partners were bad, the other preferred them. And it worked for both of them.