You’re judged by the company you keep. And in business, your success or failure could depend on
it.

Do you own a video business? Or maybe you’ve been thinking about starting one. If the latter is your case,
you’re probably thinking, “Gee, there sure is a lot to do. I’ll not only have to produce great video, I’ll also
have to be bookkeeper, salesman and ‘chief bottle washer.’ I wonder if I’ll need someone to help me.”

If you already operate your own business, there’s no wondering about it. You know it would be
nice to have someone take some of the burden off you.

In earlier columns we’ve looked at what it takes to hire an employee to help you. This month’s
column explores another possibility: bringing in a partner. It’s simple; all you have to do is give up some
degree of control and a proportionate piece of the profits. It’s simple, but not particularly easy, especially if
you’ve worked your tail off for several years to build your business. Now someone else is going to waltz in
and take a piece of it away from you? How much help were you thinking of getting from this potential
partner in exchange for this piece of your hide? It had better be a lot.

Flying Solo

If you haven’t formed your company yet, you should be aware of your options. If you want to fly
solo, you should go the sole-proprietor route. To get a lot of help from your friends, you might like a
partnership. And if you want to keep the house if your company gets sued for everything, then a
corporation might be for you. These are the legal manifestations that a business can take. (We can only
guess how many illegal forms there may be.)

If you think you might feel lonely going it alone, you can take comfort in the fact that three out of
four businesses in this country are sole proprietorships. Why is this form of business so popular? Because
it’s easy. In fact, if you don’t go out of your way to set up a partnership or corporation, your business will
automatically become a sole proprietorship.

Running your business alone means that you don’t have to ask permission to buy a new camera or
editing deck. You get to make all the decisions and take all the glory (and the gravy) when the profits roll
in. You also get to decide whether you invest those profits back into the business or put them into your
vacation fund. Those profits are your personal income and that is how the government taxes it. When you
are a sole proprietor, baby, you are the business. If you fold, so does it.

Probably the biggest downside of the sole proprietorship is that the owner assumes unlimited
liability. This means that if you run up huge debts buying cameras and edit decks (didn’t you talk to
anybody before making that decision?) then you are responsible for these debts. If someone sues your
company and wins, you are responsible for paying off the settlement.

If the total amount of investment and cash you have in the business is not enough to cover these
outlays, then your personal assets–like your house, your car, your stocks, bonds, baseball card collection–
can be sold to cover these costs. You may agree this is fair, considering a little thing called responsibility,
but unlimited responsibility is frightening.

Another problem with running a business by yourself is that you have to wear a lot of hats.
You not only have to be able to run a camera and edit video and plan a production with the best of them,
you also have to be a salesman and balance a checkbook. This may suit you fine when you are starting out,
but you may get to a point where you simply can’t stretch yourself any thinner. (You have to sleep
sometime.)

Maybe you haven’t started your business yet and you have a buddy who knows a little about
video, and a lot about sales and marketing, and can even tell the difference between a debit and a credit. It
may make sense to start the business together, with you doing what you do best and your partner taking
care of all the other garbage that you can’t stand. Of course, your partner may have the same idea. As long
as his idea of garbage is “your duties” and your idea of garbage is “his duties,” you’re both on the right
track. Obviously, it’s something you should discuss before going into business together.


Grab Your Partner

When it comes to paperwork, starting a partnership is easy–perhaps too easy. You don’t want to rush
into business with another person, because this arrangement is a commitment. Even if this person is your
best friend, take a fresh look at him as a business associate. If your partnership is going to be a fifty-fifty
proposition, can you be sure that your new partner will do 50 percent of the work and generate 50 percent
of the cash? What if he doesn’t? Will you harbor resentment that festers like an infected sore until one day
you explode and beat your buddy senseless with an S-VHS deck? You might shake your head and say,
“That won’t happen to us; we’re too good friends.” Don’t count on it.

Business is a tough world. When the business is running well, everything is peachy. But when the
cash is flowing in the wrong direction (out) and the creditors stop smiling and your back is against the wall,
you’ll ask hard questions. Best to ask them up front, of a prospective partner, before making a
commitment.

Marketing expertise is one reason you may want to take on a partner, but you may want to do it
for economic reasons. You’ve got the brains and the experience, but you’re broke. Your potential partner
has pockets as deep as the sea but doesn’t know squat about video. However, this person thinks being in
the video business might be “fun.” You think not having to pay for your equipment or rent might be “fun.”
Who knows, you may both be right.

The government considers the income of a partnership to be the same as the personal income of
the partners, which means that there is no separate business income tax to pay. If the company loses
money, you can take your share of these losses as a deduction.


We Don’t Need No Stinkin’ Lawyers

You can have as many partners as you like, which helps spread the workload around and can bring in
extra cash. (“Want to be a partner in my business? Give me a million dollars.”) But what if you bring these
people in and they run up a huge debt with Acme Video Supply? And what if they skip town? As a partner
you’re responsible for paying for the other partners’ debts. Pick your partners wisely.

To protect yourself against unseen problems, you will probably want to have a lawyer prepare a
partnership agreement form or similar document. Putting items down on paper will help you justify how
much of the business you should own. It might be phrased like this: “The capital contribution of each
partner in the partnership shall consist of the following property, services, or cash to which each partner
agrees to contribute:…” Then you would list the capital contribution, the cash value of this contribution
(e.g.: this video camera becomes part of the business and is worth $10,000) and the percentage share of the
business that your contribution entitles you to own.

Also in this document, you should spell out how to distribute the control of the business. It might
say: “Each partner shall have equal rights to manage and control the partnership and its business. If the
partners disagree concerning ordinary business matters, a decision shall be made by unanimous vote.” The
partners could elect one partner to conduct the day-to-day business of the company, with the stipulation
that no single partner could commit the company to spend more than a certain amount of money without
the prior written consent of each partner.

You should also decide how partners can leave the business. Maybe you want to say that the
partner who leaves must sell his or her interest to the remaining partners, or perhaps you would like the
company to continue if one of the partners dies. Put in writing that you consider death to be the same as an
extended vacation (well, maybe not in those terms) and the departing partner (or his or her heirs) must sell
his or her interest to the remaining partners.

Does all this paperwork sound cold and somehow, legal? As a famous con man once said, “Trust
everyone, but cut the cards.” If anything is tougher on friendship than failure, it is success. “How so?” you
ask. If your company starts to rake in the money, it should be crystal clear how that money is going to be
divvied up.

Have you seen the film The Treasure of Sierra Madre? Beside containing one of the great
lines of all time (“Badges? We don’t need no stinkin’ badges.”), the plot shows what happens to three
friends when a fortune in gold is at stake. (It involves death.)

Like a prenuptial agreement, the idea of a partnership agreement might seem distasteful to you.
But see a lawyer anyway. Cut the cards.


What Kind of Partner Are You, Anyway?

There are different kinds of partnerships, including one that keeps you from assuming unlimited
liability for everything that your partners do (which is the normal state of partnerships). In a Limited
Partnership, there are general partners who assume unlimited liability in the business, and limited
partners whose liability is confined to the amounts of the limited partners’ investments. The down side is
that limited partners can’t take an active role in running the business.

Even using a limited partnership, you can’t escape liability completely. Someone has to be the
general partner. If you don’t set this up and make a public notice telling the world that your company is a
limited partnership, then what you really have is a general partnership in which all partners are equally
liable.

Let’s say you need some extra cash to expand your business, but you don’t want a regular partner
who will have a say in how you operate. You could make a deal with a silent partner. This person would
put money in your business for a return on the investment, but couldn’t tell you what to do.

A secret partner is just like a regular partner, except that the public doesn’t know that this
person is a partner in your business. Why would your partner want to remain secret? What kind of videos
do you produce, anyway?

If a partner wants to be secret and silent, he or she gets a different name. This is a dormant
partner–a person who wants a return on the investment made in your company, but otherwise wants
nothing at all to do with you.

Another kind of partner isn’t really a partner at all, but lets the public think so in order to
boost your company’s credibility. This person is called a nominal partner. In exchange for being connected
with this popular person, you might pay a fee.

You might have a situation where you want to partner with someone on a specific project, but
don’t want them hanging around after the project is finished. You might want to set up a joint venture,
where you specify the specific purpose and duration of the venture. While the project is current, you and
your joint-venture partner are again subject to unlimited liability, so be careful with whom you choose to
join.


Video, Inc.

If the thought of unlimited liability makes you cringe, you may want to check out the other form of
business: the corporation. Investors in a corporation are financially liable only up to the amounts
of their investments in the corporation. So they can take your company away from you, but at least you get
to keep the house. Unless, of course, you sold it to buy that nice new camera, which was listed as an asset
of the corporation…. Ouch.

If you set up a corporation, the government taxes you twice: both on the income earned by the
corporation and on your individual income. If you qualify, you may want to set up an S Corporation, which
the government taxes the same way as a partnership but still has the advantages of limited liability. Ask the
IRS for a copy of Tax Guide for Small Business, publication number 334.

Think About It

Well, partner, we’ve come to the end of the round up. As you can see, there is plenty to think about
when it comes to the form your company should take, or the number of people you want to help you run it.
But, as you’ve heard in this column before, nothing worthwhile ever comes easy.

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