Two buddies met in a bar. Over a few drinks they talked about how much they contributed to their employers and how little they were paid for their efforts. After few drinks they decided to start their own business. They thought that, since they are such good friends, they would skip the formalities and proceed based on their oral agreement. They did formalize a couple of things. They form an Idaho LLC because one of them heard that an LLC provides protection. When they tried to open a business bank account, they discovered they needed a Federal Tax ID Number, so they took care of that. They initially agreed that one was to provide the equipment and know-how and the other would fund the start-up costs and do the marketing.
A few months later there was money coming in but they were struggling with paying the business expenses and paying themselves. In order to meet living expenses, one of them had to take out a second mortgage and the other had to take a second job.
Struggling to make the business grow and make a living at the same time, these two fast friends began to argue. Fifteen months after they met in the bar, they decided to dissolve the business.
However, it wasn’t over. They soon learned that there were a number of legalities in running a business that cannot be ignored. Government agencies began calling about such things as tax permits, workers compensation, unemployment insurance, payroll tax and the like. Neither knew what to do about that and because they are barely speaking to each other, how in the world could they get this all worked out?
While this is story is fictional, some business owners may ruefully recognize parts of it. Unfortunately, there is no “rewind” or “undo” button to allow us to go back and start over.
So, where did our partners go wrong? They assumed that because they were good friends, they would always agree on things or at least be able to work them out. However, they would have avoided many problems had they documented the partnership with an agreement that:
• Lays out each partner’s responsibility;
• Specifies what each partner will contribute in terms of money, tools and equipment, expertise;
• How much of the business belongs to each partner;
• What happens if one partner wants to quit or dies; and
• What happens if the business doesn’t make a profit?
Creating a partnership agreement can prevent the problems these “buddies” faced. You can do this by visiting an attorney, or we have even seen well-written agreements for a simple LLC prepared on a legal website.
Then visit us at Ada Tax Professionals where we can help set up your bookkeeping properly. We can also refer you to other resources. To quote an old adage… Don’t forget to cross your t’s and dot your i’s. In other words, start with a plan, add the details and then go for it.