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How should my new partner invest in my small business?
I'm the sole proprietor of a small general contracting business that does odd jobs in residential areas. The economy has been tough lately and I have a friend who wants to join my company...therefore becoming a partner in the business. Since the business is already established, he would be buying in with work equity and buying other things that need to be replaced, tools, upgrades, etc. My question is: Do you recommend that we keep everything separate and he buys his share of the company with cash? Or Do you recommend that he buys his share of the company by investing into improvements (ie. tools, upgrades) for the company and invests where the company needs cash most? Any advice would be appreciated. We will be sure to put everything into writing once we've established the terms, but I was hoping for advice before we finalize the decision. Thanks
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1 Answer
I've been working on the same issue. I'm a San Francisco based SP with an Australian partner. I had asked the IRS and a few federal agencies who are still not 100% clear. I believe a sort of S corporation with small businesses as controlling shareholders each responsible for own revenue taxes but protected by the corporation from liability and such is the way to go.
All the partners contribute something to the effort and receive shares for their contribution. The net profits from the group effort are divided according to these shares. As for Controlling shares, I think the one share per business or perhaps based on sized (like the US House) might work.
These are yet to be tested.
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