As a solopreneur, it can be hard to run a business, but having loyal, skilled employees can make things easier. In fact, you may realize that a co-worker would be a better fit as a co-owner of your business.
Partners in a business share both the risks and the benefits of being an owner, and an employee who becomes a partner can be a key part of your exit plan.
But before adding a partner, you should think about a few things, such as how your business is set up and the operating agreement. Find out what you need to do before you can make an employee a business partner.
Consider Your Business Entity Options
How will you give your employees a stake in your business? It all depends on how your business is set up right now. If you have a corporation, you or another partner can give or sell stock shares.
There are also times when new shares can be given out. You could also turn your business into a business partnership or a limited liability company (LLC).
Your business, your personal taxes, and the financial and tax situation of your partner are all affected by different entities. A professional advisor can look at the pros and cons of each structure and suggest the best one.
Involve your employee to make sure they understand what each entity means and have enough money to cover the cost of the purchase and any possible tax consequences.
Structures for business partnerships include:
- General partnership (GP).
- Limited partnership (LP).
- Limited liability partnership (LLP).
- Limited liability limited partnership (LLLP).
Develop a Business Partnership or Operating Agreement
A contract says how your business is set up and what each partner or member of an LLC is responsible for. Even though it’s not required by law in all states, it’s a good idea to have a partnership or operating agreement. If you don’t have one, the laws of your state will apply.
The Revised Uniform Partnership Act is used in 44 of the 50 states. This rule says what a partnership’s liabilities and assets are and how they should be set up.
It also says what the fiduciary duties of the partnership and its partners are. “State default rules govern LLCs without an official operating agreement,” the U.S. Small Business Administration also said.
Write a partnership or operating agreement for your business that talks about the following:
- Percentage of ownership.
- Rights and responsibilities.
- Profit and loss distribution.
- Financial reporting.
- Partnership withdrawal.
- Capital contributions.
Update Your Formation Documents
Depending on how your business is set up, you may need to make changes to your articles of incorporation or organization. Corporations will change the agreement to add the title and shares of the employee-owner.
A limited liability company changes the operating agreement and the articles of organization to include the new member. Depending on the laws in your state, owners may have to send these forms to the right agency.
Complete a Business Valuation
Most partners buy into a business, so you’ll need a business valuation to figure out how much your business is worth.
In general, the valuation looks at the liabilities and assets of your business. But it can be hard, which is why most business valuations are done by CPAs who have been trained in business valuation.
Draft Additional Contracts, if Required
Even though other contracts may spell out what needs to be bought, what can’t be bought, and how the deal ends, stand-alone documents can clarify who is responsible for what.
There are many templates online that let you make these documents for free or for a small fee. But you might want to have your lawyer look over the contracts before you show them to your possible partner.
Law 4 Small Business gives a list of three agreements that can be made.
- Purchase contract: This contract sets the buy-in price based on how much your business is worth on the open market. Also, an LLC will list the percentage of ownership, while a corporation will list the number of shares.
- Restriction agreement: This says what your new partner can and can’t do with the property. One of these might be a vesting schedule, which says that a person can do certain things after a certain amount of time has passed. It can also make it hard to sell or give away property.
- Buy-sell contracts are like purchase agreements, but they are used when adding a founder or giving ownership to an employee instead of having the employee pay for their share. It sets out the rules for how your company will handle the end of the partnership.