Today TaxMama® hears from Mary in the TaxQuips Forum who’s starting an adventure. “I just purchased your book ‘Small Business Taxes Made Easy’ on Nook. I am a big Dave Ramsey fan and am also reading his book ‘EntreLeadership‘. The reason I am reading books such as these is, because I started a new small business from my home on February 1. I am launching a PI business with my son as my partner. I learned that I need to write up a General Partnership Agreement in order to complete my business checking account at the local credit union. I printed out a General Partnership Agreement on line but some of the questions are technical and I want to ensure I complete it appropriately. I set up an appointment with the Small Business Development Center at my local community college for next week to discuss this with an advisor. Any advice from you at this point in the game would be very much appreciated.”
Dear Mary,
Dave Ramsey is a good person to learn from. People following his guidance tend to avoid excessive debt – and to build up savings and protections.
Congratulations on launching your new business. It sounds like an interesting venture. Some things you want to discuss about the partnership:
1) How will it end?
What are the provisions if one person wants to leave the business? Can they sell their share to just anyone? Is there a mandatory buy-back clause?
2) Who will be doing what?
Spell out the expectations you each have of the other in terms of time commitment, duties and responsibilities. Don’t just assume that your son/partner understands what you expect of him and vice versa. Who is responsible for bringing in new business? Who is responsible for the day-to-day administration? Hiring and firing of long or short-term operatives?
3) How will revenues be shared?
Will you each get a guaranteed minimum payment from the business? How will the undistributed money be handled? Will it be invested in new tools, education, advertising?
Or pensions, insurance, or…?
Incidentally, does the credit union really want a whole partnership agreement? (Which you Do need.) Or do they just want a document that gives you and/or your son the authority to sign on the bank account? Often, such authority is already built-in on the signature cards they give you for partnerships (or S Corps, or…).
Incidentally, look around for a bank where you can establish a relationship with the bank manager. You want to be able to get advice and recommendations and customer leads from your banker. If the manager of the credit union is the right person, fine. If not…keep looking. Sometimes, even if you must pay a few minor fees each month, it’s worth it if you also get a solid referral source and business advisor. You can arrange to have lunch with your banker a few times a year and pick his/her brain. Be sure to tell your banker what you want from him/her to help your business grow.
You’re on the right track.
And remember, you can find answers to all kinds of questions about starting new businesses and other tax issues, free. Where? Where else? At www.TaxMama.com.
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This is a very valid point – and one we researched recently.
If you find that one of the partners is dying, distribute the assets before death.
Then they will receive a step-up in basis.
Watch out for tax treatment of any assets that will be held within the Partnership. I received stock out of an estate and it did NOT get a step up in basis at death –because it was held within a partnership. The partnership units themselves, which we inherited, got stepped up. But when we distributed the stock out of the partnership to the heirs, we found out that the stock-assets held within the partnership, did not get a step up–entailing big capital gains taxes.