united-states, sales, partnershipI have an LLC that I founded, with a focus on “general consulting”. My focus is to help people prototype and launch ideas, and so far this is working well enough. I am the sole member of the LLC, and it’s a very new concept and I want to let it shake out a bit before I restructure the LLC itself.
Now, I have a friend who wants to aggregate and sell products (various wire and connectors scattered across vendors into kits for certain industries). He wants to go “50/50” with me, but I don’t know how to reconcile that with my LLC.
My thought was that he could hire me as a consultant, and I would handle the website and commerce operations, and the contract terms would stipulate my payment is 50% of the net profit. He thinks that in order to do this, he will have to form his own corporation or sole proprietorship.
Am I missing something here, is he missing something, or are we approaching this in the wrong way entirely?
I am in the United States (Kansas), if that makes any difference.
Yes, your friend should have a company for his venture, just like, and for the same reasons that you have a company for yours. Once both of you are properly encapsulated in separate corporate identities, your interaction can be structured to maximize benefit on both sides.
Just as one example, if your company provides web services to his company, your web publishing expenses such as hosting, tooling, and advertising the finished site, become business expenses which can reduce your tax burden for the 50% of the profit which you receive. Meanwhile your company’s invoicing his company for web services is a business expense for him, reducing his tax burden on the original 100% of profit. (this is not tax advice – I am not a tax professional)
More importantly, having your individual companies interact with each other on a business level, with formal contracts and a fully documented paper trail helps protect both of you from the negative effects that your friendship can have on your venture.
Another example, you and your friend handshake agree to a 50/50 split on profits. After a few months, your friend buys a company corvette and lists the $1000 monthly car pay as a business expense. The company’s monthly profits just dropped by a grand, half of which used to be yours. So much for the friendship.
Two friends happily agree to an eternal contract between themselves with a loosely defined, fair split of the profits. Smiling as you cross palms with dreams of adjacent beach condos gleaming from your eyes, each of you enthusiastically ignite the fuse on your friendship’s ultimate destruction.
Two companies on the other hand would never act so casually or indistinctly. Every contract has a specific starting and end date, possibly with an option for renewal. Compensation for services rendered is not based some easily manipulated concept like profit, but instead is clearly defined and formalized in a written, signed and witnessed agreement. Companies are psychopathic, fixated on their own security and profit. They are dependably ruthless in their pursuits of their goals and apply paranoid caution to protecting their assets. Companies thrive in the same environment where friendships fail.
So go buy your friend a hat with his company logo and get one for your company for yourself. At the beginning of each business day, put on the hat and start representing your company, defending its interests against all others (including your friends company) throughout the business day. Work hard and insist that all of your corporate partners work hard as well. Be determined, diligent, and demanding in all your business affairs. Then when the business day ends, take off your hats and go back to being friends.
In this way, you can be protected from the patience, empathy and kindness which you might instantly offer any of your friends but would never tolerate if required by a business colleague.
One comment - if you friend has his own company, and agrees to pass on 50% of the revenue, you do not own 50% of the company and have no say in its operations. Your friend could even stop paying you for a while if its not doing well, or declare that the agreement is terminated and potentially never pay you again leaving you with the only option of bringing him to court.
If you really want to be 50/50, then you should form a new LLC with him that the both of you own together and all business decisions need to be agreed by both partners. This way you can prevent the agreement from being canceled or from your friend stop making payments. Both of you will control the business checking accounts which will prevent any unauthorized withdrawals that prevent you form receiving 50%.
This may seem extreme, but its easier starting off with more rules to prevent any from being broken down the road and that will help prevent arguments.
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