FAQ - Partnerships, LLCs, and Agreements

Her is another exchange from one of my late night escapades from the entrepreneur forums.

A stranger asks:

Forming a LP, LLC, etc is expensive: lawyer fees, tax implications. confusing: am i picking the right one? is it flexible to change?

My company is young. like literally zero revenue. i am just building a website with my friend and we are just starting. whether this thing takes off or not, I want something written in place that guidelines responsibilities, ownership, and other specifics just in case.

Anyone have advice on what to have in place in this scenario? Is just a half hazard self written contract ok? any tips? I know nothing

My response:

Here is the helpful/practical advice:

Unless you are taking on passive investors, you do not have and LP (Limited Partnership). If all of the partners will be active in the business, you want a GP (which means General Partnership).

Either that or an LLC.

Both a GP and and a multi-member LLC would be taxed the same. For simplicity sake, the only difference is the liability protection that the LLC provides.

The other advantage of the LLC is that if things take off, you can very easily convert that LLC to an S Corp. Without getting into the specifics of why you may eventually want to do that, just know that switching from an LLC to an S Corp is as simple as checking a box on a form.

Here is the devil's advocate's advice

The disadvantage of either is that you really ought to be serious about the business before setting one up. Most likely you are not going to be able to prepare the tax returns required on your own. So there is an annual cost to forming either.

If you try to do it yourself, no matter how much solid advice you get, you will likely screw something up that will cause, if not financial hardship, at lease one hell of a headache trying to sort it out.

It's kind of the age old story. Someone wants to start a business, but doesn't want to spend any money on even the most basic necessities of doing so (attorney/accountant).

If you're really serious about the business, setting aside maybe $1000 for start-up legal and accounting fees in the grand scheme of things is peanuts compared to the costs of actually running a business.

Back to the practical advice

You can find any number of sample partnership agreements or LLC operating agreements online. Just look for one, fill in your specific information, sign it, and move on.

That does not take care of actually registering the entity with any department of state or IRS or other authorities, but it will probably hold up in court (I am not an attorney).

Good luck.