Donna Genie explains why traditional business partnerships often lead to messy, hard-to-exit arrangements and recommends using contractual joint ventures instead. She contrasts partnerships (shared business entity, shared benefits/risks, tangled obligations like payroll/benefits/tax rules) with joint ventures (each party keeps their own company, enter a contract for services/sales, pre-agree exit terms and revenue splits) and highlights joint ventures as a way to limit liability, preserve reputations, and allow individual tax and benefit arrangements.
Chapters
Would you like to bring a partner into your business? But you've heard the horror stories of all the divorces with partnerships that make it really tough to operate. Let's share a little bit of a secret about how you can bring a partner into your business if this is the right move for you. And we're going to minimize the impact of bad and messy divorces that destroy businesses. So in the old days, we had a partnership where two people decided, hey, I'm gonna bring some skills, and you're gonna bring some skills or money, and we're gonna put them together and make a great business. Well, just like marriages, these all start off great. Everybody is happy, excited, and ready to go. But the problem always comes into later on down the road. Am I being treated unfairly? Did she get more than I did? Did he not do his fair share? All of these questions start coming about, and little things pop up that make you doubt your partner. So if this were a marriage, we'd have to make decisions whether we were gonna be angry and fight or if we were gonna get a divor. All of those things are terribly messy, and we want to avoid them at all costs. So let's do that with a business, and let's talk about some scenarios there. So in the business, if you decided that you were mad at your partner, you needed to leave, there was some reason you needed to exit, or you had to get out of that relationship. Well, if you want to exit, you got to get out of business, too. So you got to feel out the situation and figure out how in the world you're going to get out of this and still have something left of your name. In most cases, people have invested a whole lot of their reputation, their money, all of their assets into a business, and it's very difficult to walk away. In a lot of cases, people are declaring bankruptcy and going to court and have messy strategies that we just don't like. So a long time ago, I bought into a couple of these cases where people had some bad exits, and we were looking for an alternative to this. What if we really feel like that partner has something great to bring to the table? There are a lot of risks. How do we mitigate that? Let's talk about a joint venture. I think this is an answer to a lot of problems in the world right now and has some win benefits for both people involved. So a joint venture. Let's talk about this for a moment. People go into joint ventures all the time with their vendors. Vendors are really your partners in business. But if you get mad at a vendor, you fire them and you find another one to replace them. Why can't we do the same thing with partners? All right, let's talk about those scenarios. Let's say that Jim and Judy want to go into business together. And Jim is a heck of a salesman. And Judy, she has the skills to perform all the services to a T. She is the best. These two each have some valuable skills for the business. So in the old days they would go into business together. And let's say that Judy gets tired and she doesn't want to do stuff and Jim's charging too little of a price for her and they have differences of opinions. Well, their choice is to break up and Jim will go sell something else. And Judy, if she doesn't like sales, is gonna have to find somebody else to sell for. Well, let's say instead that Jim and Judy go into a joint venture. A joint venture is like a contractual obligation to do things for people. So Jim has a conference all on his own. So Jim's company has a contract with Judy's company. Judy does the services, Jim does the sales. Jim's sales company has a contractual relationship with Judy's services company and he will sell for her. And everything that he sells, she will give him 20% of the sale price or 50% of the sale price, whatever they work at. And one day Jim and Judy decide they don't like this anymore. Jim wants to retire, Judy wants to go on vacation. Alright, they don't have to destroy the business to rearrange their situation. Jim can take his company and go do something else. The terms of their contract are such that they say, hey, here's what happens if we no longer want to do business together. Perhaps Jim has to pay Judy some fee to get out of his contract or vice versa. It doesn't have to destroy the business, nor does it have to destroy the reputation of the people involved. And it's super easy. It's like a prenuptial agreement in set. They've pre decided what's going to happen if they don't want this situation anymore or if it needs to change in some capacity, they could renegotiate their contract. Now the magical piece of each of these things that I run across as a CPA all the time is within a partnership. What happens if both people don't want to do something? So let's say it's a health insurance plan and Jim wants a Cadillac plan and Judy says I'll just take one. That's catastrophic. Well, as a group because they're operating as one business, they may have to settle on the same thing. Also payroll. There's lots of consequences there. Retirement plans. Well, you can't discriminate and give Judy a big retirement contribution and not give Jim one. So we have to change how we do that. One of the best ways to do that is to allow each of them to have their own company and create their own tax advice and advantages. So using a joint venture is a great way to work in a business relationship with another partner or multiple partners. Give that a shot. I'm curious to hear if you have had any situations where that would help you. I'm happy to hear, and thank you.
