A man and a woman standing in an office partner to buy a business.

Find a Partner to Buy a Business

Thinking of finding a partner to buy a business with? There are lots of reasons to choose this option.

Partners can offer three forms of capital you need to succeed in your new business:

Intellectual capital

Great partners often have knowledge, experiences, and skills that their counterparts don’t have. As a team, they have a solid understanding of what needs to happen in every part of their business. Plus, they excel at seeing those plans through.

Financial capital

Great partners have access to cash or ways to acquire funding. They have a good credit score (at least 650), which is a must for taking out term loans, asset-backed loans, or SBA loans to finance the acquisition, purchase inventory, or fund the business’s operations.

Human capital

Great partners are willing to put in the work that’s needed to make the business a success. Depending on the arrangement, partners may take a hands-on or hands-off approach. In either case, they’re willing to contribute when and how they’re needed.

Should I find a partner to buy a business with?

Maybe. But before you decide, make sure you understand both the pros and cons of this setup.

Let's start with the pros.

It's always great to have more skills, knowledge, and support as you buy and run a business. There are benefits to having access to more financial capital, too. If you choose a partner who has cash on hand to invest in the business, you can avoid taking on costly loans or leveraging your assets, two options that introduce expense and risk.

Now, the cons.

Depending on your arrangement, you may not have the autonomy you want to make decisions and execute your ideas—at least, not without talking with your partner first. And while you and your partner will share in the costs, you’ll also share the profits.

If you decide to partner to buy a business, commit to finding a person (or people) with the traits your business needs to thrive.

 

What should I look for in a partner?

The partner you choose should have skills, experiences, connections, or resources that will benefit your business. You should be confident in that person’s abilities to team well and see through plans to achieve important goals.

You can partner with anyone you choose: friends, family members, colleagues, or others with valuable skills, resources, and experiences. Choose a person (or people) who will bring a clear advantage to the business.

 

How do I organize a partnership?

There are two ways to organize a partnership. There are many more ways to set up a business with multiple owners. Before making a call, check out your options. Here are some of the most popular setups:

 

General partnership

A general partnership is a co-ownership arrangement between two or more people. In it, both have legal and financial responsibility for the business.

 

How it's formed:

  • General partnerships are formed with a partnership agreement. This agreement should be drafted by an attorney and signed by every ownership partner.

 

What's great about this setup:

  • Each partner shares in the responsibility of running the business.
  • The partners can pool their strengths, resources, and connections to support the business.
  • It’s possible that the partners would have better access to loans with favorable terms because of the strength of their combined credit ratings.
  • Partnerships avoid the double taxation that impacts other ownership arrangements. Business profits and losses are reported on the partners’ personal tax returns.
  • The ability to allocate losses to owner partners can increase the business’s internal rate of return on investment. It may also afford the partners some income tax benefits.

 

The drawbacks:

  • Each partner is personally responsible for the business’s taxes, debts, and claims against the partnership.
  • Each partner is liable for other partner(s)’ debts.
  • Creditors can seize any partner’s personal assets to reclaim debts.
  • Each partner can commit the business and other owners to obligations without signed consent.

Limited partnership

A limited partnership is an arrangement that includes one or more general partners who have full legal and financial responsibility for the business and one or more partners whose liability is limited to the amount that they invest in the business.

 

How it's formed:

  • Like a general partnership, limited partnerships also require a partnership agreement. This agreement should be drafted by an attorney and signed by every ownership partner.

 

What's great about this setup:

  • As a general partner, you can raise the capital you need for acquisition without giving others a say in its daily operations.
  • You can repay the investments your partners make in the business on terms you both agree to (such as when the business has a certain amount of excess profits) rather than at fixed intervals of time.
  • Partnerships avoid the double taxation that impacts other ownership arrangements. Business profits and losses are reported on the partners’ personal tax returns.
  • The ability to allocate losses to owner partners can increase the business’s internal rate of return on investment. It may also afford the partners some income tax benefits.

 

The drawbacks:

  • You, as the general partner, are responsible for the entirety of managing the business.
  • You bear full responsibility for the business’s debts, taxes, and claims.
  • Creditors can seize your personal assets to reclaim debts.

C Corporation

A C Corporation (C corp) is a legal structure for businesses with one or more owners. Through this structure, owners’ personal assets are typically shielded from the business’s debts and financial obligations. Businesses that use this structure have an elected board of directors, adopt bylaws, issue stock, hold shareholder meetings, file annual reports, and pay annual fees related to their formation. They are taxed separately from their owners, and the owners also pay tax on the income they receive from the business.

 

How it's formed:

  • Owners file Articles of Incorporation with their state and pay a filing fee.

 

What's great about this setup:

  • In many cases, creditors cannot seize your personal assets to reclaim debts.
  • You may offer shares to as many individuals or entities as you like, and they do not have to reside in the United States.
  • You can offer multiple classes of stock to suit investor preferences.
  • Your company’s shareholders can sell and transfer their shares freely.
  • You may be able to deduct all of your business’s charitable contributions and donations, provided that they don’t exceed 10% of your company’s income, as well as some benefits, including health insurance.
  • Recent tax reform policies may allow you to pay a lower corporate tax rate than the maximum rate that’s currently in place for individuals.

 

The drawbacks:

  • Because the business must pay tax on its earnings and the shareholders must pay tax on their dividends, the corporation’s earnings are taxed twice.
  • The rules for corporations are strict and complicated.
  • The costs of running a business as a C corp are higher than in some of the other arrangements.
  • You'll need extensive documentation to establish this type of business.

S Corporation

An S Corporation (S corp) is a legal structure that shares many similarities with the C corp, but there are two key differences. First, a business organized as an S corp can issue only one class of stock to a limited number of U.S. resident shareholders (presently 100) rather than multiple classes of stock to an unlimited number of shareholders. Second, the S corp itself doesn’t pay tax. Instead, the owners report the business’s revenue as personal revenue.

 

How it's formed:

  • Owners file Articles of Incorporation with their state and pay a filing fee, and they file Form 2553 with the IRS.

 

What's great about this setup:

  • In many cases, creditors cannot seize your personal assets to reclaim business debts.
  • You and other shareholders don’t have to pay a corporate-level income tax.
  • Because of the Tax Cuts and Jobs Act (2017), you and other shareholders may be able to deduct up to 20% of your net qualified business income.
  • Your business’s losses will pass through to its shareholders, who may be able to use the losses to offset income.

 

The drawbacks:

  • Because your business is limited to 100 shareholders, you may have difficulty raising large amounts of capital.
  • The shareholders of your business cannot be entities, so you won’t be able to raise capital from venture capitalists or private equity funds.
  • You will likely need to limit your shareholders’ ability to sell or transfer their shares to ensure that shares aren’t given to an ineligible shareholder, a move that could terminate your S corp status.
  • Your shareholders will be taxed on the business’s profits, even if income isn’t distributed to them as cash.

Limited liability company

A limited liability company (LLC) combines elements of a partnership and a corporation. Like a partnership, the LLC allows owners to avoid paying income taxes because they report the business’s profits and losses on their personal income tax returns. And, like a corporation, the LLC helps protect owners’ personal assets from the business’s debts and liabilities.

 

How it's formed:

  • Owners file Articles of Organization with their state and pay a filing fee.

 

What's great about this setup:

  • In many cases, creditors cannot seize your personal assets to reclaim business debts.
  • LLCs avoid the double taxation that impacts other ownership arrangements. Business profits and losses are reported on the owners’ personal tax returns.
  • The ability to allocate losses to owner partners can increase the business’s internal rate of return on investment. It may also afford the owners some income tax benefits.

 

The drawbacks:

  • Your company cannot issue stock.
  • Some small businesses are ineligible to form an LLC. Certain states exclude banking or insurance businesses, accounting firms, architecture firms, and medical practices, among others.

If you decide on a partnership rather than a C corp or S corp arrangement, you’ll need to create a partnership agreement. An attorney can help you put one together. Here is what it might:

  • The name of your business
  • A brief description of its purpose
  • The purpose of your partnership
  • The duration of the partnership
  • The kind and value of the assets each partner will invest
  • How you will use to share profit and loss
  • The compensation of each party
  • How the business’s tangible and intangible assets will be divided if the partnership is dissolved
  • Provisions for the dissolution of the partnership
  • Provisions for buying and selling stakes in the business, which should include how the business will be valuated
  • The conditions for admitting new partners
  • The method by which the partners will settle disputes (often arbitration or mediation)
  • How to make changes to the partnership agreement

 

General partnership agreements can include clauses that spell out each partner's authority, responsibilities, and restrictions in engaging in outside business activities.

Limited partnership agreements can include unique clauses, too. Clauses may specify when each partner will receive reports and updates on the business; the conditions for returns; and how the general partner can buy out a limited partner.

Would you like to speak with an attorney about forming a partnership? Connect with one here:

 

What are my other options for raising capital?

If sharing the ownership of a business doesn’t appeal to you—or if you’d like to consider it with other options—you might consider SBA loans, term loans, asset-backed financing, seller financing, 401(k) options, and lease-to-buy financing. You can learn more about these options here:

 

Looking for support through the process of buying a business? We can help. Log into your owner’s portal for a free step-by-step guide to make your venture a success.

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