Wealthy & Wise: Will Your Partnership Sink or Sail?

About the Video

Having business partners means you are no longer operating the business yourself. You’ll have two or more people who share the same vision and goals for the company. It’s a great opportunity to innovate and expand the business utilizing different skill sets and knowledge. While partnerships sound exciting, many business partnerships have also failed due to poor planning and business structuring. Watch Cort Christie, founder of NCH, and Adam Kintigh, one of our top Corporate Analysts, discuss why partnerships sink and how LLCs can help you avoid issues.

Prefer to read? A full transcript is provided below.

CORT:

Hello and welcome to another episode of Wealthy and Wise. I’m your host, Cort Christie. And today we’re going to be talking about partnerships, partnerships in business, how we put them together, what the best type of business entity to use for a partnership and the agreements that are so important in a partnership. You know, most people who get married date their significant other for years, sometimes, before they’re sure that that person’s the right one to spend the rest of their life with. And when it comes to business partnerships, most people just have a friend or a buddy or somebody they’ve known for a long time, and they just decide to bring their skills and talents together. And they really don’t know a lot about what makes that person tick. And it can be real dangerous jumping into a partnership with just anyone. But most importantly, if you do, do it right so you can protect yourself when things don’t go the way you want them to. And I have an expert with us today. We have Adam Kintigh, who’s here to talk to us about how to set things up properly for your business. And I want you all to listen close because there’s some great information If you’ve ever thought about going into a partnership with someone else. Adam, thanks for being on the program here today.

ADAM:

Thank you so much for having me.

CORT:

Absolutely. And Adam, you’ve worked with, you know, thousands and thousands of business owners. As an expert business structure specialist working, coaching, supporting in all aspects of business startup with folks. Whether it’s real estate or just any type of business. And I know you’ve learned a ton about what you need to do in order to structure a partnership correctly. And so where do you start the conversation with somebody who’s you know, has a friend, they want to start a business together?

ADAM:

Yeah. So, it’s a great point. You brought up you date somebody for a long time to realize they’re the one that you want to get married to. Often we jump into business partnerships. We always go into partnerships with usually people we love and trust, a family member, a friend. And so, we decide, I’ve got the money and they have the time. I’ll put my money up and they’ll work on the business, or they have the money and I have the time. And so we join forces, which is great.

CORT:

Yes.

ADAM:

But to do this without having the right structure in place, can cause huge problems. And it seems like the that in most the time in going into a partnership, it’s either when the company is doing very poorly or when the company is doing really well. That’s when we have most of the problems. Our lawyer, Kurt, says it best. The only ship that is sure to sink is the partnership. And we can have very successful partnerships, but we have to have the right structure in place. So first thing I always look at is, number one is, are we going to do a deal together and see if this works? Because if that’s the case, I might not need an LLC. I might do a joint venture agreement. So I’ll call our attorney and have him draft up a joint venture that says, I’m putting you in this. You’re putting in that. When the property sells, we’re doing real estate, for example. I get this, you get that. Just a joint venture to test the waters to see how it works. But I want to have that in writing so that if something happens to me, if something happens to you, we have something in writing that says what we’re doing with this partnership. And the more details we provide, the better. If we do a deal together and decide that it’s going to be something good, then I’ll set up an LLC with a buy, sell and partnership agreement. And it’s one of the key pieces. An LLC provides so much flexibility from a tax standpoint. It allows for unequal distribution of profits or losses, allows both of us to come together in this business, but protects both of us. So, years ago, I was setting up an LLC for a guy and he shared with me it was himself and two of his good friends he went to high school with. They said, all right, we’re just going to stack up some money. We’ll put a down payment on a duplex and we’ll buy a property. And he did. They saved up their money and they bought a duplex. And one of the partners says, hey listen guys, I need a place to live right now. And how great is it that I can live in half of the duplex and I’ll pay fair market value for rent and the other half we’ll rent out. And so, the guy said, that’s a great idea. So, he moves in. What they didn’t know is that their partner was a 1099 independent contractor who had not been filing his taxes. So, after a year of operating, they’d saved up some more cash. The plan was to buy another duplex. Well, one day he goes to check on the bank account and the money is gone. And he thought immediately that he had been duped by those two partners. Where did our money go? Where is our down payment cash? As it turns out, the partner that had the IRS problem, they were all three on the bank account. And because it was just a general partnership, the IRS came in, they looked at whatever bank accounts his Social Security was on and they went and took that money.

CORT:

Oh, geez. Imagine the shock and horror that would come from that. And you don’t know what it is. And all of a sudden you see that the IRS is the one that took your money. How did that work out?

Adam:

Well, we just don’t know what skeletons are in the closet. There might be problems that I don’t even know are problems. And all of a sudden these things pop up. So, as it turns out, years later, they’re going to refinance the property. Well, couldn’t do that. There was the lien on the property. Couldn’t refinance until that, that partner’s rest of his tax debt was paid and that was $75,000.

CORT:

Oh geez.

ADAM:

And as it turns out, the partner stopped returning, phone calls, disappeared. So, they’re stuck with this property.

CORT:

Very dangerous. Very dangerous. And you just don’t know. So, here’s a case. You don’t know the partner’s background. You come together, you bring your talents and resources into a deal. And because they just decided to have a general partnership, if they had filed a corporation or an LLC, it may have kept the IRS at bay, may have. Most of the time it will in my experience. But I mean, that’s a horrible situation, you know, and I know there’s a lot of horrible stories out there about partnerships gone bad. Now, I had a partnership years ago, and we were very different personalities, which was great. And we had different skills, which is great too, because we brought those together and we built a really successful business. And in that business, we had different ideas of how we wanted to spend the money that we were earning from the company. And I had a partner that liked to spend money and I was a saver. And so he’d spend money by taking staff out and paying for very expensive dinners or renting fancy cars when he was out of town or staying in very expensive hotels when he was out of town and then coming back with a giant bill in addition for things that he spent at that hotel. And that became a problem between us and we ultimately came to terms with it and worked it out in our compensation structure. But that’s one of those things that you don’t know who is the most motivated, who’s going to work the hardest, who’s going to be the saver, who’s going to be the spender? And what do you tell somebody that you might not know how they are going to end up? Like how do you start structuring around that?

ADAM:

Yeah, so this is a great question. So, when we formed the LLC, it’s one of the most important things to start with. Is to have a buy, sell and partnership agreement. So, a buy-sell agreement is a, think of it as a prenuptial agreement. This is OK, we’re going into business together. If either of us want out of this business, whether voluntarily or involuntarily, one of us might pass away or become incapacitated. We have a legal agreement in place of how this divorce is going to take place so we don’t end up in divorce court later on.

CORT:

Right.

ADAM:

So that buy-sell agreement is super important to protect you and me going into business together. Or, if someone gets divorced or has to file bankruptcy, how is this business protected from your partner’s mistakes?

CORT:

Right.

ADAM:

The second thing is the actual partnership agreement, where we’re clearly defining roles and responsibilities of who do, who does what, when do we distribute profits, what are the things that we agree on that should be paid for by the business and what things should we be paying for? So, you talk about your partner like lived a lavish lifestyle, and yet legally in from an IRS tax code standpoint, those are legal business deductions.

CORT:

Sure.

ADAM:

But it just wasn’t fair to you.

CORT:

Right.

ADAM:

So, having that partnership agreement, we can talk about things like what happens if we have to put more money in the business, who’s putting the money in, when do we put it in? How about distributing profits? When should we distribute profits? All of these things have to be mapped out. And again, good old lawyer Kurt, he says it best. The dullest is pencil is always better than the sharpest mind. So having these things in writing is a really big deal to make sure we continue having a healthy partnership, healthy friendship, a healthy business relationship, just having everything mapped out. And that’s where having a good attorney to get that document done is always a, you look at the cost of having the document done and the cost of not having it done. These are so important for any business owner to think about right when you start the business.

CORT:

Absolutely. And it’s so important. You know, I think of times historically where we’ve gone through tough economies. Right? And if somebody that’s in a partnership is more financially successful, maybe they’ve had other businesses, they’ve saved their money, they’ve invested it well, but they’re generally hooked up with somebody that hasn’t done as well. And sometimes there’s agreements that one will do more the day-to-day work. The other one is can provide more capital. But when the business gets tough and things aren’t going well, now, you still have to pay the guy that doesn’t have the money and the guy that does have the money can take a break. And I ended up in this situation also one time, and it was during the last Great Recession. And I was in a financial position in one of my businesses to not take a salary for about two years. But one of the partners that I had in this operation that was doing some work in the business and nothing more or less than I was doing, wasn’t in a financial position and had to continue to draw a salary. So now here I was really financially supporting the business and helping out where this person had to have a salary to pay their mortgage and pay their bills. It was not fair to me at all. Thank goodness we made it through that time period. But, you know, there would have been things that we could have thought about in a very formal document that we did not have at that time. And that really helped us through those difficult moments. That I know, one of the biggest complaints that we hear about with partnerships is, you know, after the fact of once things have gotten developed is somebody loses interest. Somebody goes off and chases another shiny object, starts something else, but they leave this business venture sort of on the side or they leave it with the other partner who still expected to carry the load. And that’s tough. And that happens all the time. And you look at what divorce rates, we talk about, you know, prenuptial agreement, right? Why have a prenuptial agreement? It’s because marriages fail. Right? And so, you get ahead of it and it’s really unfortunate that some people have to think this way. But, there’s 60% of marriages that fail on the West Coast. I know nationally they say it’s kind of a 50% average. And I think that the numbers are even higher with the second marriage, you know But in businesses, the divorce rate could be like 90 plus percent and so anything that you can do to set it up properly ahead of time is vital. So, as you are, you know, having a conversation with somebody in a partnership, you know, what are what are some of the questions I think that you bring up that, you know, elicit a response from them that kind of get them thinking?

ADAM:

Well, and typically it’s that as we are coming together and we’re deciding who’s going to be doing what. Yes, that’s normally the part that starts this conversation is that we all go into a business with best of intentions. And our intentions are that I’m going to be doing this, you’re going to be doing that. But life happens. I had a sick child or Covid or all of these things that take you off from being able to do those things that you’re supposed to be doing.

CORT:

Yes.

ADAM:

And that’s normally the start of the conversation is, what are the roles and responsibilities? Who is going to be doing what? And have you, do you have anything in writing to protect each other?

CORT:

Right.

ADAM:

Another big one is the divorce side of things. So, in just talking about if I, you know, if I go on Facebook, I see that your life is all rosy, everything is great. But if I was a fly on the wall, we might find that your marriage wasn’t so great.

CORT:

Sure.

ADAM:

Your finances weren’t so great. So, all I can see is this virtual wallpaper of all these great things happening.

CORT:

Of what you want people to think of you.

ADAM:

Exactly. So, with that in mind, there are so many things that we just don’t know. And by having the agreements in place, we start talking about, well, what happens if you get divorced Cort? Now what? How is that going to impact our business? Is your wife going to take half or all of your half? These are things that are left to the mercy of the courts, unless we have agreements in writing. So, no one ever wants to talk about it. It’s just like talking with a guy and say, you know, if I’m talking to a guy and a gal and I ask the question, they’re boyfriend and girlfriend going into business together. And I ask the question, I hate to ask it, but are there any plans of marriage? And that right there is a tough question because there may be when that marriage is going to take place. We don’t know. And I hate to put people on the spot, but the fact is, is that you’re going into business with someone that you’re not sure if you’re going to marry or when you’re going to marry them without having agreements in place. Just so important for our clients to think ahead a little bit to avoid these costly mistakes that come down the pipe.

CORT:

Right. And I will tell you this, and I know you know this and I’m not going to tell you, but I must share it with our audience today is, you will be heading off a disaster by doing some of this planning and this legal work upfront in every partnership. I don’t care how small it is, you know, you’re both broke and you’ve got a great idea. Well, it’s not always going to be that way if that great idea takes off. You’ve got to get some things documented and you think about how often people change jobs today. You know, they’re moving from one job to another and they’re not consistent. Well, imagine a business that you get into, and you lose interest. After ten years, you’ve been doing it for a long time and, you know, maybe it’s not enough to carry you and you’re like, OK, I’m making some decent money, but I’ve got another idea and I want to go off and do that. Well, if you don’t have this stuff documented, you know, what’s the agreement if I leave? Am I going to get paid? What’s the deal if I decide I want out? How much are you going to pay me to take me out and what does that look like? And all these things can be built in and you can avoid these disasters that we’ve seen so many times with people that don’t sit down and go through a buy-sell agreement. It’s very simple. Just that alone can save you a ton of misery along the business partnership path. I also know, Adam, that you’ve done some structuring with people where you’ll use multiple business entities depending on the nature of what their business is. When would somebody want to look at, you know, one entity to run the business and different entities for the partners themselves?

ADAM:

Yeah, that’s a great question. And that’s what I love about doing the partnership structure. So, to start with, if you and I decide we’re going to do business, I put together the LLC. And that is half owned by me, half owned by you, with our agreements in place. If we operate that business, your portion of profit gets paid to you. My portion gets paid to me. As a partnership, it’s not a W-2 that I’m receiving. It’s a 1099. So, I’m basically self-employed in this partnership. So what I like to do is to set up an LLC, taxed as an S-Corporation so that my portion of profit gets paid to my company. Now I get to choose how I want to expense or invest my portion of the profit. Now, of course, you’re the saver. You want to save your money. I want to take advantage of living the corporate lifestyle. I want my company to pay for my trip to Hawaii. I want to have my board meeting and have the most lavish and nicest meals. I want to do those things. I want to have a nice car paid for by my company. I do that with my own company. You choose how you want to expense your profit.

CORT:

I like that.

ADAM:

I can do what I want to with mine.

CORT:

So, with my former partnership that I had, where he was a spender and I was a saver, we could have taken our profits of the business, just divided them equally. And then he could have done anything he wanted with all that money that he had. And he would have had sort of this autonomous business unit, I guess is what you’re saying, that he would choose to what to do with it. And I’d probably put it in a 401K or maximize my retirement or take the money and reinvest it in something else. So therefore, we don’t have to have those awkward conversations like, you know, do you really have to have that $400 bottle of wine every time you go out to dinner? You know, is that really a thing that we need to be paying for? And so that would have saved me a lot of pain during that time, had I set that up. So, you’re having these conversations all the time with people. And I think what’s so important is that individuals that are watching today understand that you can do some of this stuff on your own. You know, there’s probably buy-sell agreements out there that you can pull online and get a good idea about this. But, you know, I think of it the same way as a prenuptial agreement. You could probably go find one online and start filling in some blanks. But what’s so important is you don’t know what questions are going to come up. You don’t know what questions to ask and so that’s where somebody works with you as a professional, who’s helping them, advising them on how to set this up, correct, how to avoid all these potential pitfalls and problems that will occur in every partnership. Not may, will occur because it does go on. But if you’ve got a structure, that structure and agreement will help you get through these challenges that you will have in your partnership. So, I want everybody you know, this listening today to know that don’t go it alone. Talk to an advisor, talk to someone like Adam at NCH that is there to help support your needs, walk you through this, ask you the right questions. Kind of, he does an incredible analysis when you’re on the phone and you’re having this conversation he’s going to understand what it is you’re trying to do, where you’re going. Maybe there’s more than one partner. Maybe you’ve got two or three partners because you all are bringing your talents together. All the more reason to sit down and find out everything you can about how to set this up properly, to avoid the problems, to avoid the pain and stress later on that can happen when partnerships have conflict or worse yet, fail. And then what? Who picks up the pieces at the end of the day? So, Adam, thank you. Thank you for sharing so much information with everyone today. And again, if you’re thinking about going into business with somebody else, make sure you call Adam, learn more, call NCH and get more information on how to set this up properly. So, thank you for being a part of the program today.

ADAM:

Thanks for having me, Cort.

CORT:

Absolutely. And thank you all for tuning in to another edition of Wealthy and Wise. I’m your host, Cort Christie. Have a great day!

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DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.