On Partnership Investing

Image Credit: Aidan Jones

Tonight’s topic comes from a note sent to me by a friend. Here it is:

David, I have heard you say that you have entered into partnerships in the past. What are your rules for partnerships, who will you enter with? I have a neighbor who is interested in starting a business, the start up cash is small $5000. I think there might be good opportunity, but I am concerned for good reason about my time availability, as well as Not being “unequally yoked”. What business relations do Paul’s words govern. do you have different rules for minority, majority, or controlling shares?

I appreciate your thoughts.

I have two “partnership” investments. One is very successful and is an S Corporation. The other is a limited partnership, and I wonder whether it will ever amount to anything. Both were done with friends.

There are a few things that you have to think about with partnerships:

Is your liability limited to the amount of money you invested, or could you be on the hook for more if there are losses/lawsuits?

Are there likely to be future periods where capital might need to be raised? Under what conditions will that be done?

What non-capital obligations are you taking on as a result of this? Labor, counsel, facilities, tools, etc?

How will profits and losses be allocated? Voting interests? How will it be managed? When will the partnership end? How can terms be modified? How can partnership interests be transferred, if at all? Etc.

Do you like the people that you will be partners with? ou may be partners for a long time.

Be ready for the additional tax complexity of filling out schedule C, or a K-1, or some other tax form.

Go into a partnership with your eyes wide open, and check everything. If your partnership interests have limited liability, and the economics are structured similar to that of a corporation, then things are clearer, and you don’t have to worry as much.