Why an LLC Is the Ideal Structure for Small Business Partnerships

Remember, I am not an attorney and this information should not be considered legal advice. You should always seek legal counsel for any agreement you enter into.

Now that that’s out of the way. Let’s get started.

In my career, I’ve had multiple partners including family, friends and business associates. Early in my career, I was given good advice and guidance on the best structure for a small business partnership. Which I will go over with you today. But first, let’s go over some best practices for working in a partnership.

For me, all good partnerships are based on three things: open communication, complete transparency and defined roles and responsibilities.

It is absolutely critical for future partners to have open and detailed conversations about their vision and understanding of the business in general and how the business will actually operate in detail. You and any future partner must be able to discuss any topic related to the business and do that with full transparency. Any concern or issue no matter how small should be addressed from the beginning.

If you and your future partner agree on the vision for the company, the next step is to clearly define roles and responsibilities in the day-to-day operation of the business. This must also include discussions and agreement on all financial aspects. Who owns what and how any profits are shared.
Do not avoid discussing how issues and disputes will be handled.

You must plan the divorce before the marriage. An optimistic entrepreneur may not want to address potential problems or potential failure, but ignoring these possibilities can set the stage for a real mess when things are going south. Agree to what happens upfront so you are not fighting those battles at the end when stress, anxiety and negativity rule the day.

Now let’s talk about the corporate structure I use for my partnerships and that’s an LLC or limited liability company. In my opinion there are three important benefits provided by the LLC business structure.

First is Personal liability protection for all partners, which are called members in an LLC. Your personal assets are not at risk from any legal action or debt created by the business.

Second, is the LLC Member Operating Agreement. The LLC Member Operating agreement provides a vehicle you can use to clearly define and establish every aspect on how the business will be run including the roles and responsibilities of all members involved in the day-to-day operation of the business. This should be an extremely detailed agreement which will not only define how the business is run but also how disputes and possible dissolution of the business is handled. In my last partnership, I was a minority owner, but my interests in the business were protected in the Membership Operating Agreement by establishing that all major decisions including the overall direction and strategy for the business had to be reviewed and agreed upon by all members. With that agreement in place, I was comfortable as a minority member in the LLC.

And the third reason I prefer LLCs are the personal tax benefits that can be provided to members who are active in the day-to-day operation of the business. These tax benefits become available when you elect to have the LLC taxed as an S-corp. Since I am always active in any business I’m involved in, all of my LLCs have had the S-corp election.