Deborah Sweeney of MyCorporation.com answers frequently asked questions that she receives from business owners.
Question: I started my business on my own, but now I’d like to add a partner. How do I do that, from a legal perspective?
Answer: That depends on what type of business you’re running. If a company is a simple sole-proprietorship, bringing on a business partner isn’t too complicated. The most pressing part of the conversion is filing for an Employee Identification Number. Since there are now two owners instead of one, you can’t just use your own social security number anymore. You will also have to report the business’s earnings and losses using “Form 1065 – US Return of Partnership Income,” and file individual K-1’s to cover each partner’s portion. While not legally required, you should also draw up a partnership agreement to codify how the partnership will be run, disputes will be settled, and, if necessary, the business will be dissolved.
If you run a corporation or LLC, bringing on a partner is a bit more complicated. Converting from a single-member to multi-member LLC means filing the above-mentioned tax forms normally associated with running a partnership, and will require that you amend your operating agreement to specify how much the new partner is investing in the new LLC, what their compensation will be, and what is expected from them as far as responsibilities. Normally you don’t have to report any new members to the state until your Annual Report is due.
Corporations are a lot more complicated because stock is involved. Technically, the shareholders own a corporation, though normally the person who founded the company owns most of the stock. If you bring on a partner, you’ll either have to sell a portion of your shares, or have the company issue new shares, so you need to discuss how much they are going to invest. You’ll need to amend your Articles of Incorporation to include the new partner, and cover what they are entitled to. That amendment will have to be voted on by the Board of Directors and filed with the Secretary of State.
No matter what entity you have, make sure that you have at least a yearlong working relationship with any potential partner. Bringing on a new business partner should not be an impulse decision, nor should be a way to solve money problems.
Got a question for Deborah? Ask it in the comment section.
Are you looking to open a small business? Here are a few more helpful articles from Deborah Sweeney to get you started:
This article has been updated.
Posted: March 28, 2018