It’s easy to see the benefits of a partner in our personal and social lives — but are there benefits to a partner in business? An LLC might be a better way to structure your business.
“Partnerships and co-ownerships are in disfavor within the legal community,” says Keith R. Havens, an attorney at Havens and Associates, LLC, in Rockville, Md. These legal arrangements, says Havens, are seen as “very foolish.” Though the words may seem harsh, there is good reason for the sentiment. In the eyes of the state, a partnership gives equal weight, responsibility, and authority to each person in the partnership. However, in the day-to-day operations of a business the responsibilities of each partner are rarely equal. Unfortunately, when someone in a legal partnership realizes the scales are tipped in the other partner’s favor, there is little legal recourse or protection. A partnership agreement is, in the end, an unnecessary risk for a tech to take.
Kesha Hackett-Belcher of Oakland, Calif., knows first hand the personal risk of a partnership. A salon owner for four years, Hackett imagined the benefits of merging her salon with another one in her town. It would reduce expenses such as electricity and rent, the new spot would offer her and her clients a larger space, and the responsibilities of owning a business would be shared. She closed her location and merged with the other salon, bringing with her a manicurist and an esthetician.
Hackett thought she had protected herself. She asked a lawyer to create a broad contract that allowed her the flexibility to renegotiate after a year. It wasn’t long before problems developed. The first one shocked her: Her co-owner was an unlicensed tech. “I had no idea,” says Hackett. “I assumed since she owned her salon, she was licensed.” Hackett says she asked her partner about the license, but there was always an excuse: She had lost it, she was waiting for a new one from the state, or she had received it but it wasn’t framed. “I told her that our licenses are required to be hung on the wall, but as time went on, I realized she didn’t have one,” says Hackett.
Over the course of the year, Hackett realized the contract they had signed didn’t address daily issues that became points of conflict. “We didn’t have clear-cut boundaries about which products to use or who would make decisions,” says Hackett. At the end of the year, Hackett received her biggest surprise. When it was time to renegotiate the contract, Hackett’s partner told her that instead of splitting the profits as they had under the old contract, the new contract would require that Hackett pay a 50/50 commission for booth rental. Hackett’s name was not on the lease, so she left the salon, but not without a cost. Her manicurist and esthetician remained behind, and Hackett started over by herself.
Hackett’s negative experience with a partnership is not unique. Catherine Pham has been a nail tech in Oakland, Calif., for 12 years. She and a friend became excited about the possibilities of owning a salon together and finally made the move with only their friendship and an oral agreement to protect them. “We thought it would work fine,” says Pham. “She would open; I would close. We would split all expenses.” Unfortunately, each went into the business relationship with different business philosophies. “I wanted employees who would build the business financially,” says Pham. “I didn’t want to stay behind a nail table for hours every day — I wanted to take care of the administrative work and the business management end.” Pham says her friend and partner pressured her to work behind the table. Pham insisted that a successful business is one where the revenue of the business isn’t dependent on the owner. As the business conversations became polarized, their friendship suffered. After only 10 months, Pham walked away from both. “We had different expectations of the business, and it ruined our friendship,” says Pham. “It was really sad.”
Asked what advice she has for other techs, Pham says to look at the relationship like a marriage. Ask questions such as: “What does each person bring to the table?” and “How do we distribute the responsibilities and tasks?” “It’s not always 50/50,” Pham cautions. A contract should address specifically what each person is required to do for the business. Done well, a partnership can still work, says Pham.
Partnerships Vs. LLCs Legally, there is an alternative to a partnership, one many techs may have never considered. Instead of entering into a partnership, says Havens, techs can protect themselves by setting the business up as an LLC, a Limited Liability Company. An LLC essentially makes the business its own legal entity, which protects each partner legally. (Incidentally, an LLC offers a sole owner legal protection as well. This is called a single-person LLC.) However, an LLC does more than offer legal protection. It also helps partners (especially novice business owners) organize their business structure and assign responsibilities in a way that removes the “mine and yours” struggle. An LLC helps to legitimately create an “ours.”
Instead of being called a partner, each person becomes a “member” of the LLC. The state requires that the LLC have an operating agreement. This is where job descriptions for the company can be created and assigned. “An operating agreement should answer common questions,” says Havens. “Who is in charge? Do all members need to agree when a financial or business decision is required? How do you split revenue? How do you handle short-falls, and what happens if a person wants to leave?” Because many businesses don’t make it beyond the three-year mark, says Havens, it’s essential to have an exit strategy.
The problem with going into business with a partnership agreement or with only an oral agreement, warns Havens, is there is no protection of your personal assets. “If your partner decides to take out a $2 million dollar ad during the Super Bowl, you just became personally liable for 100% of that ad,” he says. On a smaller scale, you are 100% responsible for rent, supplies, liability issues, etc. In an LLC, the business incurs all debt and liability.
Writing an operating agreement for an LLC is required by law and should help partners (members) have necessary conversations that will prevent future problems. “Do it at the beginning, when each person is more agreeable to take on responsibility,” says Havens. Havens calls this the honeymoon period, when partners still believe their business philosophies align perfectly, and that they are going to get rich together.
To create an LLC, techs can hire an attorney or file the paperwork on their own. All the information should be available on the state’s Department of State website. There techs can run a search to see if the desired name of the LLC is taken, find forms and fees for setting up the LLC, and find a phone number to talk through questions with a representative.
However, while it may initially reduce costs to file the paperwork on your own, it could be a wise investment to hire an attorney to draw up and file the necessary documents. The right attorney will help members navigate questions that non-legal minds wouldn’t consider. Additionally, a lawyer can help generate conversations that may seem detailed and unnecessary, but that he or she knows can inevitably turn into deal breakers.
For example, in the case of Pham and her friend, each had a different idea of where a business owner should expend her energy. Pham believed a business should grow out of strong staff with the owner acting more like a manager or visionary. Her friend believed an owner should add revenue to the business by building her own clientele. Had these philosophies been aired out and examined prior to opening the business, it could have helped create a complementary relationship between these two friends and partners where each person worked within their strengths to build a profitable salon.
An LLC does not eliminate all business problems, of course. Arguments can develop any time two people work toward a common goal, since each thinks her way is the best way. But an LLC offers personal protection in a way that a partnership cannot. The operating agreement often acts as the catalyst for members to consider and articulate their personal goals — and then develop common ones that will help create a strong, clear vision for the future and success of your business.
The Questions to Ask Keith R. Havens, an attorney at -Havens and Associates, LLC, in Rockville, Md., says techs should make sure these basic questions are addressed and answered in their business contract, whether it’s a partnership (which he does not recommend) or an LLC:
1. Who is in charge?
2. Who can make business and financial decisions — one person or must there be agreement among all partners/members?
3. What is the breakdown and assignment of responsibilities?
4. Create positions and job descriptions. Who is assigned and responsible for each job?
5. If a person acts against the agreement, how is the wronged party compensated?
6. How are revenues dispersed?
7. Where does the money come from to cover shortfalls in the business?
8. What is the exit strategy if a person wants to leave, becomes ill, or dies?
The techs in this story had negative experiences with partnership. What about you? Go to www.nailsmag.com/forums and share your successes and failures with partnership arrangements.
Illustration by Angela Martini
KEYWORDS: opening your own salon, staff management, business tools, finance