Blending businesses: Different shades of partnership
It’s relatively easy to form a company today; file a formal online application through the state of Wisconsin (quick, easy, and costs about $150 to establish an LLC) and submit some extra forms come tax time. The real trick, of course, is running a successful business – client acquisition, work fulfillment, invoicing, and paying taxes on time – at a profit. The good news is that there are innovative ways to collaborate with one or more business partners without creating a formal partnership entity, and even stand-alone SOHOs (sole ownership, home office) can legitimately recruit and add “and associates” to their business identity, sharing the risk of business ownership with other like-minded entrepreneurs. Here’s how.
In this scenario, the workload is seamless to the customer but parceled out between informal partners brought together to complete a specific job. Each has his or her own legal entity; the person who got the job initially (the “contractor”) will subcontract part or all of the work, do the billing, collect the fees, withhold a set administrative fee, and then pay the subcontractors, sending each a 1099 form at the end of the year to reflect payment made from his or her company to theirs. Many “and associates” business counseling services are loosely organized in this manner.
This typically is a more formal arrangement between a specific group of independent service providers working in concert to acquire and service customers. In some cases, they may actually form a legal business entity together while still owning and operating individual businesses. One or more of the “associates” may make the presentation to the client or the sale, but each of the others has a pre-assigned role.
For example, consider a downtown restaurant operated by three independent (not joint) partners. It is a true client-sharing enterprise when one partner owns the meat-processing company that supplies the meat to the business. He is paid fair market price for his meat and also a percentage of profits from the restaurant. Another owns the actual restaurant management business and is paid a return to his or her company on the basis of the business receipts – plus a partnership cut from profits. Another partner owns a pasta-making business, a mainstay ingredient on the menu, and is paid fair market value for his product, and then a fair share of the umbrella business profits. (Continued)
When one business-to-business partner has a clear advantage in client acquisition (established brand, etc.), he or she may bring the other partners into a firm in the work-sharing mode, but client sharing typically calls for specific and unique expertise from each participant, and the client usually understands that “and associates” refers to people the contracting agent routinely works with and would recommend after the contract ends. Billing may be modular, for different services performed, or paid through a jointly owned business with appropriate payouts to the partners after the job is completed. In that scenario, all of the partners benefit when any of the partners continue to service the client after the initial sale, as an administrative fee continues for any future work with the client, so that it is not competitive in the future, but rather a collaborative after-job service model.
The partners agree that …
Though work-sharing and client-sharing groups are not legal entity descriptions, but rather a defined new way of securing collaborative business opportunities, the tie that binds is a formal agreement or contract and, as such, should be as inclusive as any partnership agreement. Important elements to include are:
- Named partners and the date of the agreement, with a specific term length or termination clause.
- For more formal client-sharing enterprises, capital investments and/or contributions from the partners are clearly spelled out, including any administrative fees or commissions for sales. The contracting entity might be required to establish a capital account from which no partner can make withdrawals beyond his or her share in the profits and losses of the project.
- Terms for profit and loss. Typically, a separate income account would be maintained for each partner. Partnership profits and losses are then charged or credited to the separate income account of each partner. If a partner has no credit balance in his income account, losses are charged to his capital account. Each partner may, from time to time, withdraw the credit balance in his income account. Avoid the word “salaries” – salaries are paid to employees, not partners. Make sure agreements are legally correct.
- There are administrative duties. Who is the “manager” and who does the banking and maintains the books? For work-sharing agreements, the contracting company is invoiced by the subcontractors and provides the 1099. For client-sharing arrangements, it should be agreed upon and committed to writing to avoid problems.
- Termination of the work arrangement is typically voluntary, dissolved at any time by agreement of the partners. Provisions should be made for substitution if one partner is not able to service an incoming contract in a timely manner, etc.
- Arbitration. If any controversy or claim results from the agreement, or breach of the agreement, you may want to say in advance that it will be settled by arbitration in accordance with the rules of the American Arbitration Association, or the pre-chosen and agreed-upon arbitrator.
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