As I was finishing up massage school at the end of 2016, my friend Bob suggested we rent a space together. I was planning to start my own business while he still had a full-time job and wanted to offer massage on the side. It made sense financially to rent a space together. But the idea gave me pause for two reasons: 1) I know myself pretty well and sharing just isn’t one of my strengths; and 2) Bob was my friend and I wanted to keep it that way. Given those two things, could sharing space possibly work?

Doing Business Together

You and your friend get along great and your skills complement each other. So, when you have a great business idea, it only makes sense to form a business together, right? Maybe.

“The mere exercise of developing a partnership agreement will illuminate the unspoken fears and foibles that usually stay hidden until things get fractured. The process will also bring forth the beautiful synergies and intentions that make the union so potentially rewarding.” – Danielle Laporte, The Firestarter Sessions, at p. 284 (Harmony Books 2012).

Not So Fast

While my friend Bob and I weren’t planning to form a business together, sharing space would impact both of our businesses and our friendship. I suggested we sit down and talk about the idea first. I wanted to know what kind of space he was looking for and how he wanted to decorate it because one space needed to be able to reflect both of us. Then there was how much we were willing to pay in rent and how to split it, as well as what kind of schedule we’d each keep. Once talked about it and found we had a similar vision, we began looking for a space that fit that vision.

“You’re laying the groundwork here for how you will continue to make important decisions, manage change, and respond to tough times together.” – Id.

Forming a Business Partnership

Even if you and your friend don’t choose to create a formal partnership by registering with the Iowa Secretary of State, you may still be treated like a partnership in the eyes of the law. That means you could both be liable for the other’s actions if you’re sued, and without a formal structure, you personal assets could be vulnerable. Not to mention the detriment to your friendship if your business doesn’t work out or if it’s fantastically successful but not following the vision of one of the original partners. When all is said and done, will your friendship remain?

“If you can’t face your present-day fears directly, then you’re ill-prepared for harsh realities. And that’s the prickly, uncomfortable work that needs to be done when cocreating agreements.” – Id.

Put it in Writing

A strong partnership requires a written partnership agreement. That begins with a discussion between the two of you about the division of responsibility, shares of the business, legal rights to anything you create, and what happens if one of you wants to leave the partnership or dies. Once you’ve talked through these details, which admittedly isn’t easy, then you can put them into writing.

Once Bob and I found a space we both liked, we sat down again to discuss the details. We negotiated how much we’d pay and the schedule we each wanted. We talked about how we wanted to decorate it and who’s equipment we’d use since we both had massage tables and Thai mats. This required give and take by both of us. 

After the discussions, I wrote up a simple agreement that we both read and signed. It reflected all the things we’d talked about. It was also a good tool when one of us didn’t remember something because that’s part of what happens with verbal agreements – people recall details incorrectly or don’t remember the whole thing. That’s why you want to put your partnership agreement in writing. I’m happy to say that when our lease was up, and I decided to close my massage practice to focus on my law practice, we were, and still are, friends.

Our agreement was a simple one, and I’m an attorney. You may want to consult with an attorney as well about your partnership agreement because there may be issues or complications you’re not aware of. Then you can focus on the joy of doing business with your friend!

“If you can make it through the agreement-building process, you clear the runway to really soar.” – Id.

Questions?

If you have any questions about forming a partnership or creating a partnership agreement, please contact me at 515.238.483 or regenoldlaw@gmail.com.

On Friday over the lunch hour the Iowa Secretary of State’s waiting room was full of lawyers and citizens waiting for approval of their business filings.  One attorney joked that spring must mean it’s time to form a legal entity.

What is a Legal Entity?

A legal entity is a limited liability company (LLC), corporation, association, or partnership.  It has its own legal status because it can sue or be sued, incur debt, and buy or sell property.  In contrast, if you haven’t formed a legal entity for your business, you have a sole proprietorship.

When is the Right Time to Form a Legal Entity?

If you’ve just opened your business, it may be best to keep it simple with a sole proprietorship; approximately 70% of small businesses are.  As a sole proprietor, be sure to register your trade name with the county recorder office of the county where your business is conducted, as required by Iowa Code chapter 547.  As your business grows and becomes profitable, you might consider forming a legal entity, like an LLC.

What are the Benefits of an LLC?

Under Iowa law there are a few different business structures to consider, but for a small business the relative ease and flexibility of an LLC may be best.  Consider these questions:

  1. Do you maintain professional liability insurance? If so, that may be enough to cover you in the early days of your business should you be sued for any type of negligence. However, that type of insurance won’t cover you for any debts your business might have. One of the benefits of an LLC, and other legal entities, is limiting liability to your business assets.  If you’re sued or default on a debt, your personal assets, such as your home, car, and personal bank accounts, are not at risk.  (Note: the debts must be under your business and not you personally for this to apply.)
  2. Do you have employees or partners? If so, you could be held liable for their actions, and an LLC will limit your liability for their actions to your business assets. While we hope the people we do business with will conduct themselves legally and ethically, that isn’t always the case.
  3. Are there tax benefits? By default, an LLC with one member is taxed as a sole proprietor or as a partnership if there are two members, but you can choose to be taxed as a corporation as well.  A sole proprietor or an LLC taxed as a sole proprietor is taxed for both the employer and employee’s share of taxes.  But an LLC gives you the flexibility to be taxed as a corporation instead, which may be beneficial when your business becomes profitable.
  4. What kind of administrative burden is there? The sole proprietorship is simplest by far because you file your trade name with the county recorder and file taxes through your personal return.  LLCs must be formed by filing paperwork with the Secretary of State and require the filing of a simple report every other year.  Of the different legal entities, an LLC has the lowest administrative burden.
  5. Do you want to leave a legacy? A sole proprietorship ends either when the business closes or the owner dies.  An LLC could be transferred to another, so if you hope to create a lasting business, be sure to mention that to your attorney so that can be taken into consideration.

An Investment in Your Business

Forming a legal entity is an important step.  It requires an investment of your time and money.  Be sure to talk with your trusted legal and tax professionals about the right decision for your business.

Ready to get started?

Contact me at regenoldlaw@gmail.com to get your LLC started.