I have started a small lawn mowing business with my brother, and would like to know what is the best way to set up a business partnership. Does anyone know of any equations or resources that would be helpful. Here are the details for the business: We purchased a previous business for $6,000. $4,000 was a loan the other $2,000 came out of my pocket. He is mowing all the lawns while I handle all the marketing & bookkeeping. The marketing has been very effective in a short period of time and we are close to doubling the size of the company within 2 months of being in business. I have started a number of small businesses and each time continue to struggle with these questions. How do you structure a partnership? How do you value each persons contribution? Any help would be greatly appreciated!
Hi, I am in Washington State so the rules may be different where you live. I would suggest a limited liability company, although you could do an S corp. but I am not as familiar with those. That would help protect both of you personally (company assets probably wouldn't be involved in any suit against the company). LLCs allow you to create an operating agreement (similar to a corporate charter in C and S corporations) outlining how the business will legally operate. In it you could give you and your brother specific percents of the company (example: you get 65% and he gets 35%). You might have already known the above but I thought I should start with that info just in case. As far as deciding how much each of you should get, here are some thoughts: A. You can actually separate ownership and revenue if that turns out to be helpful. You could agree to split the revenue with your brother 50/50 but agree that you should own 55% due to the fact you are handling the business management side of things. Giving one of you a little more ownership than the other can help if you ever end up at a stand still. B. You could also have the ownership and/or revenue based on the estimated hourly contribution of each party. You work 50% more so you should get 50% more (which would be 75% total) or visa versa. If doing this it might be best to have each parties contribution reevaluated every so often. I suppose you could even set it up so that each parties pay is equal to the % they contributed on a weekly basis. C. You have a lot of flexibility so whatever you come up with that is fair for both of you could probably be written legally in an operating agreement. I would suggest you not go without an operating agreement though, as it overrides many less desirable state laws. The steps I took to start a LLC in Washington were as follows: 1. Applied for a separate tax id number/employer identification number with the IRS. 2. Filed a master business application with the department of revenue. 3. Filed a certificate of formation with the secretary of state. 4. Filed for a license with the city I lived in (you may also have to file something with your county). 5. Signed the operating agreement. I hope that helped to some extent, let me know if I can answer any more questions or explain something better. You could find some free sample operating agreements online or have an attorney write one for you. I would advise you to at least have an attorney review your finished operating agreement it to make sure it is legally binding. And of course, nothing I wrote should be taken as the legal advice of an attorney (even though I might be one someday) and should be researched before being believed. -- Nathan Enns
Nathan, Thanks a ton for the excellent advice. This makes perfect sense, and will be of great use in figuring out the partnership. Thanks, BJ