If you are creating a startup with partners it’s important to realize that you will need to do some things differently from running a business on your own. Here are best practices to forge a value-added partnership and avoid the pitfalls of working with others, to build a sustainable and successful startup.
Separate personal and business funds & resources
One of the most common ways to jeopardize your liability protection is consistently commingling your personal and business funds. Keeping them separate is a relatively uncomplicated task when you operate as a single owner, but it becomes a little trickier when you have partners involved in the equation.
Apart from accounting and tax headaches, commingling of business and personal funds can suggest fraudulent activity, or cast doubt over the validity of the company as a separate entity. This becomes important in a law suit, and may lead to a court’s piercing the corporate veil that shields your personal assets from liability. And when you have partners as part of the company structure, for example as members of an LLC, then any member can break down that liability protection and expose the others.
It’s very simple nowadays, even remotely, to form an LLC in California, for example but this is only the first step. Establishing roles and responsibilities in the Operating Agreement binds each member into the way of conducting business that protects everyone. For example, maintain business accounts to be used only for company expenses and deposits. Create a strict policy for all partners in the organization to separate personal assets such as vehicles from company assets.
Maintain comprehensive records for reimbursements
The realities of running a business may require a partner to use personal money to cover a business expense, or use a personal vehicle or equipment. Use a clear reimbursement process to lay the paper trail for reimbursement. Similarly, if a partner uses company assets or money for personal purposes, make sure to use a leasing form or other contract for the company to be recompensed. Clean paper trails will greatly strengthen your liability protection. Remember, anyone in business can be sued, but part of the likelihood rests on how weak you look to an opposing lawyer. Keep good records, follow your protocols, and you become harder to sue.
Clearly define roles and duties in legally binding documents
It’s tempting for entrepreneurs to wear every hat as they get their business off the ground, even when multiple partners are involved, but it’s important to operate within clearly defined roles as officers of the company and account for the duties and responsibilities of each partner.
These roles and duties can be spelled out explicitly in the (hugely flexible) operating agreement of an LLC or in separate contracts for shareholders who are working partners. You’ll have meetings as owners of the company where everyone’s voting interest is weighted accordingly, but in terms of operations you should require each partner to operate according to the terms of the agreement.
And you can follow the same rigor with overlapping of partner roles that you use with reimbursements. If someone fills in on another’s task for a period that starts to feel reimbursable, then create a paper trail to cover this. Reimburse with money if it seems prudent. Arguments between partners in a startup can take years of simmering to boil over, and the lawsuits won’t start until the company is worth some money. Avoid this happening.
Develop a broad IP protection strategy for now and the future
In the digital era, almost any company is creating Intellectual Property as part of its operation, and this IP has value that you may have to fight to preserve. IP protection is a significant concern especially with the surging creativity of a startup and its new ideas. Be sure to develop a coherent strategy for safeguarding your IP well before you may have to defend it.
Partners may contribute an idea early on that is not monetized until years later, possibly after they have left the company. Remember those early days of brainstorming on a couch in the garage? Did a friend help you develop a name or a concept but not join the company as a partner? Maybe years later you’re worth suing for a royalty on that IP.
To avoid legal complications later, include language in every contract that stipulates the ownership of IP generated on behalf of the company or using company resources. Spell out shares and interests clearly if IP ownership is transferring or dividing in any company activity.
Define real estate investment responsibilities in your partnership structure
Paying a mortgage instead of rent builds company equity that you may value later. Younger entrepreneurs may think they’re too young to own property, but it’s a wise decision as long as it makes financial sense for you and your business. And if your company grows into new premises one day, you and your partners might suddenly own rental property.
Partners may even choose to use their combined energy and first-time homebuyer advantage to enter landlording as a business in tandem with the core business of the startup. Generating rental income and building equity could add security as the business grows. Just as with other business operations, it’s as important to specify which partners are responsible for which tasks associated with property management as it is to establish how the revenue stream is disbursed. These duties can be listed in an LLC operating agreement and spelled out in further detail in supplemental documents.