Mark Kohler, a CPA and attorney, shares four tips for successful business partnerships: discuss best and worst-case scenarios upfront, get a written partnership agreement, document all changes in writing, and plan for phantom income by making distributions or setting money aside for taxes.
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Hi, Mark Kohler here with another two minute tax and legal tip. Let's talk about partnerships now. I think partnerships are awesome. In fact, they get oftentimes a bad rap saying, oh, watch out for a partnership. You're going to be in a lawsuit or your business will fail. That's not true. And in fact, so many times, one of the best ways to take your business to the next level is to partner with someone that has different skills or resources than you. Now, does the partnership need to be designed properly and organized correctly? Absolutely. And I want to give you four tips to make your partnership a success. Number one, talk about best case scenarios and worst case scenarios. Now, I know it's easy to talk about the best case scenario. We're going to make a ton of money. How do we split it up? But we need to talk about the worst case scenarios too. What happens if we need to put more money in the business? What happens if we're not fulfilling the expectations of each other? These things need to be talked about and resolutions and agreements and solutions talked about in advance and put into your agreement. Do it now because it'll always be harder to talk about later. Number two, it almost goes without saying, but I'm going to say it anyway and that's have a partnership agreement. Now, that could be an LLC operating agreement, a corporation with bylaws and minutes as well. But have something in writing and do it at the beginning. Have it right out there at the outset talking about responsibilities and duties and expectations and how you're going to split up profit and what's the exit strategy? Put all that on in writing it from the beginning and then put it in the drawer because I promise you someday those rain clouds are going to come and you're going to want to pull it out and talk about what you agree to in the beginning. Number three, document everything in writing as the partnership evolves and relationships change, and they will, and you're going to agree to new things on a regular basis. Put it in writing because I promise you the recollection of one partner is going to vary from the other. And that's when partnership disputes begin. Maybe even an email trail could work, or a napkin at Denny's or I don't care. Put it in writing and both of you initial it and put it in your corporate book so that you have it for future use. Number four, let me talk about phantom income. And this is something a lot of partners don't talk about enough. And that is what happens in our LLC or corporation when income is attributed to us on our tax return through flow through income, but maybe we haven't distributed any cash. You've reinvested your money in the business, but each of you now have a tax bill. That's what we accountants call phantom income. Make sure there's some provision in the partnership agreement where you make regular distributions, at least to make tax deposits or pay annual tax bills. You gotta look at what's coming through on paper as income and just not reinvest all your profits. Make sure you set aside a little money for taxes and agree in advance for those distributions. Finally, again, don't be afraid of a partnership. In fact, it could be the difference between succeeding or failing in your business. If it's done right, it can be phenomenal and provide tremendous success for you and your business. Anyway, I hope these thoughts help you in your partnership relationship. Keep living the American Dream and don't give up. Thanks for listening and I hope that information was helpful. And let me speak from the heart here. I've been talking about topics like this for 1015 years. I'm a CPA attorney, best selling author, radio show host and I am passionate about helping small business owners save taxes, build wealth and protect it. Please check out the link right here. Download my free ebook on 10 Common Mistakes Small business owners make in the taxes legal arena. Also check out my social media links here. I've got Daily Tips, a weekly blog radio show every week. This information is free and I'd love to help you. Click below. Find out more about me and thanks for listening.
