General Partnership? Limited Partnership? Or
I am in the early stages of bootstrapping a startup. The product is a cloud-based service for businesses within a very specific industry. I have worked as a UX & UI developer and design freelancer for many years. During this time I have developed a working relationship with another professional that has a niche in the industry that this service is targeted for. I actually started developing the service out of frustration from working on/implementing similar services with his clients (but always separate from the work I did for him).
The question that I'm ultimately trying to get to - I cannot decide the best way to organize share and stake within the company. He is fully aware of the service, and as I develop portions of the platform I have shown it to him and we've talked about it in depth. It started out as one if those "wouldnt it be cool if..." conversations. Anyways, I am fully aware that I need him to get started - he has the ability to sell the product to very large companies. In fact, we have already started making deals with a few companies that our interested in some of the features we are ready to start testing. However, there are some caveats: we are located on different sides of the US and as far as I'm concerned I will be running the day to day operations of the business and will have more stake in the success of the company. Although I believe the fair thing is to split profits/shares between us evenly, I am hesitant about splitting management/control evenly. Not due to trust, but I have a feeling that this obligation will end up being obtrusive to the growth of the company. Also, for what it's worth, the only capital is coming from me.
Is it common in general partnerships to have precise definitions in how control is broken up, or should I look more at a limited partnership or even something else?
2 Answers
General Partnership is a bad idea, IMHO. You should discuss it with your lawyer, which I'm not, but as a lay-man I can tell you this:
- It doesn't have limited liability - all the partners are liable together and separately for all the debts.
- It is not an entity. It exists as a DBA, but it is basically a name for a group of people, not an entity on its own.
- You need to have a very good legal document describing the rules and agreements on how to distribute the earnings, the losses, the assets, etc.
What can you do instead?
- Limited partnership - all the partners except for one (who has to be a General Partner, and will be the manager) have limited liability. You still have to have a partner who has unlimited liability.
- Limited Liability Partnerships and Limited Liability Limited Partnerships - these kinds of entities solve the liability issues, but might not be available in all states.
- Limited Liability Company - its an entity which is a hybrid between a Corporation and a Partnership. For all the entities up until here (GP, LP, LLP, LLLP, LLC) - you have to have a clear and precise legal agreement between all the partners/members on all the things relevant (earnings split, losses split, assets split, management, etc). Taxation for all of them is path-through (except for LLC that chooses differently).
- Corporation - a legal entity separate from its owners, shares of ownership are recorded in the stock certificates, and all the owners in the same class are treated similarly (Corporations can generally have many classes of ownership, though, unless its a sub-chapter S corporation). You can have C-corp and S-corp. The corporations are managed by officers (employees) and the management is directed by board directors (appointed by shareholders). Shareholders have limited liability.
C-corp and S-corp are referring to the taxation laws by which the corporation works: Sub-chapter C or Sub-chapter S. Any corporation is C-Corp by default, but some may choose to be S-Corp. They can only do that if certain conditions are met. S-Corp corporations are pass-through entities and don't pay corporate taxes.
If you're creating a business entity you have to get a proper legal and tax advice to decide which entity, and which taxation method, are the most beneficial for you.
Startups usually are corporations. If you have outside investors, they would probably want "preferred" stocks, which will require it to be a C-Corporation. Investors would probably stay away of entities which are not corporations, for various legal reasons (for example - you can't go public with a partnership, in most of the cases; In Partnership/LLC you have to have majority of the partners/members to agree to changes, not owners of majority of shares; etc).
-
Good answer. Might want to stress that the only real way to raise any serious investment, or even any angel funding, is with a corporation. Where do you want your business to go? Build a large scale business? Then in my opinion, a corporation is the way to go. And within a corporation you can define roles whichever way you, as long as it's legal. So you really need to speak with an experienced lawyer about this. And if you don't have a corporate lawyer, then the first hour is usually free. – Frenchie 12 years ago
Most startups tend to be an LLC or a C corp. Any reason why you are looking at a partnership? One important advantage of an LLC or a C corp. is limited liability. With a partnership there is no limited liability. With both an LLC and a C corp., you can distribute ownership in any percentage you want.
One thing to consider is whether you really want to share ownership of you company with this other person. It sounds like this other person isn't in it for the long run. Instead, he could be an employee or contractor and you could compensate him well for the business he brings. E.g., some percentage of sales he brings in.
