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Creating a partnership - Q & A

Eric calls in to ask how to form a partnership in a business venture.

Rich Sloan: So off to the nation.  We have Eric out of Sacramento, California.  Welcome to the show, Eric.

Eric:  Thank you very much, Jeff and Rich.  It's good to be on the phone line with you.

Rich Sloan:  How can we help today?

Eric:  I have a question about partnership, forming a partnership.  I have two partners that are interested in joining me in a business venture.

Rich Sloan:  Okay.

Eric:  And I am -- myself and Partner A are investing 50 percent into the partnership venture, and then Partner B is investing the other 50 percent.  So my question revolves around ownership and control of the company with regards to the -- I'll be putting in the most sweat equity and the most work into the company while --

Rich Sloan:  Let us interrupt you first.

Eric:  Sure.

Rich Sloan:  What is the legal structure of the business?

Eric:  Well, that's the thing.  We can't decide on whether we go with a partnership or with an LLC.

Jeff Sloan:  I think you want to look into an LLC.

Rich Sloan:  Absolutely.

Jeff Sloan:  A limited liability company gives you a lot of flexibility, and the way you can do that is that you could establish an LLC and establish a schedule of ownership in that LLC, division of the membership interest in that LLC, based on the amount of sweat equity you guys anticipate putting in.  So let's say you got a pie that's equal to a hundred percent.

Eric:  Uh-huh.  Right.

Jeff Sloan:  Let's say you're going to put in two-thirds of the work and the other partners are going to put in a third.  What you could do is you could start out by recognizing you with two-thirds of the ownership and the other two partners having a third.

Eric:  Okay.                    

Jeff Sloan:  And then what you do is you do a round of funding, which dilutes each partner pro ratas and changes the percentage based on that.  So the guy that's putting in 50 percent --

Eric:  Uh-huh.

Jeff Sloan:  -- then gets that amount of additional stock based on the pro rata share of that next round, if you will.  You know, and it works by percentage really, really well.

Eric:  Okay.

Rich Sloan:  Let me add to that by saying, one of your primary concerns is control; right?

Eric:  Right.

Rich Sloan:  And in an LLC the amount of equity -- or in the case of an LLC the specific language is membership interests; that's the equivalent of equity --

Eric:  Uh-huh.

Rich Sloan:  -- that you own does not determine the amount of control you have.

Jeff Sloan:  What's -- right.

Rich Sloan:  Determines the amount of control in an LLC is what's called the operating agreement. 

Eric:  Okay.

Rich Sloan:  And that agreement stipulates who is responsible for what, who has what rights and who doesn't.

Eric:  Gotcha.

Rich Sloan:  And so it's a way for you to separate the issues.  So if you want to be three partners together and you have different levels of contribution, that's fine.  That could be associated with an amount of ownership in the business.  As it relates to --

Eric:  Okay.

Rich Sloan:  -- control, completely separate issue.  If you're the guy who's going to do the operations of the business and you want control of the business and it's your idea and all that stuff --

Eric:  Uh-huh.

Rich Sloan:  -- then you can have a situation where you have decision-making control.

Eric:  Okay.

Rich Sloan:  All right?

Eric:  Uh, it's perfect.  Thank you so much.

Rich Sloan:  We are very strong on the LLC as an entity.

Jeff Sloan:  This is a prototypical case. 

Rich Sloan:  Yeah.

Jeff Sloan:  Absolutely.  That's the way to go.

Rich Sloan:  We do have an article about the technicalities associated with partnerships, and you can find that at Startupnation.com on step number four of our "Ten Steps to Open for Business."  Step number four is called "Select a Structure," and so you can certainly tap into that there.