Discussion:Funding an S-Corp

First, I would never start a partnership or multiple member LLC or an S Corp with multiple people. It is rare that such business combinations don't end up in court--with one member gambling away the payroll taxes, stealing from the company, indebting the business on the sly, etc. That's the worst case of course. More often the business fails and one member doesn't have his share of the money to satisfy the creditors of the company...then guess what happens? I advise all of my clients to structure the business so that one person owns it and hires the others on as employees with profit sharing agreements, benefits, guaranteed contract, etc. Even for family members who would never screw the others over, people die or divorce and suddenly two happy partners are saddled with an angry ex-wife or grieving spouse as a new partner. No thanks.

As for funding, I personally subscribe to the no debt philosophy. The number one problem for new businesses is cash flow...some of the best business ideas sunk because of it. So adding a loan instead of capitalization from cash is just adding unnecessary burden to a new business.

JMHO.

Michael

Another option--depending on the business objective and duration--could be to have both participants form their own LLC's or S Corps and then create a joint venture. If the circumstances fit, that's another decent option.

No matter what the option chosen, a very good attorney needs to be involved in drafting the agreements. As many problems as partnerships create, poorly written organization documents account for about 90% of the issues.

Michael

Mid life crisis of a partner

Divorce of a partner

Partner finds a new life interest

Partner finds a new girlfriend

Divorce and partner has to sell his share and you hate the new partner

Death of a partner and a spouse who doesn't want to play

Arguments

The business slows and one partner must get another job to make ends meet and still expects his/her full share

Conflicts of interest

Failure to abide by non-compete clauses

Partner gets hooked on drugs or alcohol and you can't get rid of them

Partner has a nervous breakdown

Partner gambles away the payroll tax deposits

Partner incurs debt on the sly

Partner breaks the law

Partner kills someone in the company vehicle and the damages exceed your liability policy

Any number of scenarios can happen and most of the time do happen. Think about how many times the average employee changes careers in their lifetime and then consider doing the same thing with the same person for the rest of yours. No thanks.

I would think that some of our members here MUST be working through a lot of failures with the economy right now. I would imagine that partnerships run pretty well during good times and it takes little effort to maintain the business. However, when cash flow problems hit, I would imagine it is heck.

Michael

One partner is content in life and wants to be home for the wife and kids, the other wants to franchise and open twelve more locations.

One likes to save, one likes to spend.

One is a jerk, as it turns out, ticking off customers, suppliers, and employees, while the other spends all his time making everyone happy again.

Both are men, who have no communication skills after grunting and farting, so are blissfully unaware of any problems.

Or, both are women, who know absolutely everything that the other one either is, or could be thinking at any particular moment in time, esp. about her, but have no idea what's going on in the business.

Or, both are women, who know absolutely everything that the other one either is, or could be thinking at any particular moment in time, esp. about her, but have no idea what's going on in the business.

Ha ha ha, now THAT was funny!

Michael

I appreciate your listing what could go wrong here. I have seen the same in my practice (partners changing locks on the business, both partners with checkbooks, one getting in a huff and taking the books from the other). This is a list I will refer to when I talk to clients interested in partnering together on a business.

Perhaps we can also recommend training on improving communication skills.

By the way, for those of you in a partnership accounting practice, how do these work and other partnerships not?

How do Lawyers and Accountants organize in partnerships and keep it together....I would like to know that as well.

Michael

By comparison, the owner of the prior firm I worked at should never attempt a partnership. It's just not in his makeup. He's had a long string of failed attempts including reciprocal lawsuits on the explosion last year.