Howdy, Partner!

Partnership can be the road to growth or ruin. Up-front planning and prudent matchmaking are the keys.

Like a marriage, a business partnership requires complementary personalities, not mirror images. Unlike a marriage, it’s wise to talk about how the divorce might work before you get hitched.

Unfortunately, partnerships are too often combinations of the wrong people who never talk about the right issues before they join forces. The results can be ugly, ranging from failed businesses to ruined friendships. Done right, however, partnership remains a proven path to growth in the design business.

Finding the Right Partner

Most designers are inherently either creative types or businesspeople, but not both, says David Goodman, a Los Angeles-area design-firm consultant. Some can balance the disparate tasks of administration and creative direction. But most design businesses ultimately need more than one principal to keep growing.

Goodman notes that effective partnerships can pair designers with additional designers or other professionals, such as copywriters, marketers or account executives. Ideally, he says, designers shouldn’t form partnerships until they’ve had a few years of experience as employees in established shops to see how other studios operate.

Design-firm partners should have complementary skills, not only because it adds to the talent mix, but also because it makes the personal relationship work better, says David Baker, president of ReCourses, a Nashville, TN-based consulting firm for creative-services businesses.

“The best partnerships are composed of people who need each other, and thus don’t question what the other person brings to the table,” Baker says. “When a partnership fails, the last sign is when each partner questions the other’s contribution. And that’s more likely if they don’t have distinct roles.”

According to Baker, most design partnerships involve equals, although in some cases a single major owner is supported by several junior partners. “Unless there are minority partners with only 5%–10% stakes, then all the partners ought to be making the same salaries,” Baker says. “With lesser partners, the disparities in compensation would be based on disparities in ownership when profits are distributed.”

Personal compatibility is just as important in choosing a partner. Even if partners bring complementary skills, they should also have similar work styles and outside commitments. Personal conflict is often at the heart of partnership failures, Goodman notes. “For example, one is working harder than the other and feels the other partner isn’t involved,” he says. “Or the spouses don’t get along, or there’s interference in the business by one of the spouses.”

Imbalance in personal wealth among partners can also create strains when the business struggles, Goodman says. “If one partner is married to a doctor and the other to a stay-at-home mom, there will be challenges when they run into rough times.”

Structuring a partnership

Choices in structuring partnerships include the general partnership, the limited-liability company and the corporation. For instructions and paperwork on filing for incorporation, contact the Secretary of State in your state capital. (A good reference is The Business Side of Creativity: The Complete Guide for Running a Graphic Design or Communications Business, by Cameron S. Foote, W. W. Norton, 448 pages, $25.)

General partnership. This is the simplest arrangement, says Leigh Griffith, a Nashville, TN, lawyer who specializes in partnerships. Most states don’t require government paperwork to register a general partnership. The disadvantage is that the partners are individually liable for the firm’s debts or legal obligations.

Corporation. A corporation generally provides full protection from liability to individual owners. The primary disadvantage is added paperwork and expense, plus “double taxation,” in which corporate income is taxed at corporate rates, then taxed again at individual rates when distributed to owners.

A subcategory of incorporation, the “S” corporation, avoids the double-taxation issue by taxing income only when it’s distributed to owners. But “S” corporations involve additional regulations and paperwork. One pitfall, Griffith says, occurs when a partner contributes money to a struggling firm in the form of a non-interest-bearing loan. The Internal Revenue Service may construe that as a second class of stock in the corporation, which violates “S” corporation status and triggers unexpected taxation.

Limited-liability company. This structure, which is a hybrid between a general partnership and a corporation, treats owners as individuals for tax purposes but provides them with personal-liability protection. LLCs generally require state registration but involve less paperwork than corporations. Griffith recommends a written agreement, regardless of the legal form the partnership takes. The agreement should spell out who has decision-making authority in various areas, such as taking on debt or creative direction, and what happens if someone wants to leave the partnership.

Griffith recalls one star-crossed partnership in which discussions nearly ended in fisticuffs over disagreements about who would run the company and what would happen if more money was needed after the owners’ original investments. “If you can’t figure out how you’re going to address things if they don’t go well, the first time something doesn’t go well you’re going to grind to a halt,” Griffith says. “The worst time to try to find a solution is when you’re in the middle of a problem.”

Planning for the Worst

Partners most often run into trouble when discussing exit strategies, Baker says. That’s one reason why every agreement should address issues concerning the dissolution of the partnership, including:

• A formula for valuing the company if a partner wants out

• Terms of the buyout, dictating the period over which the firm repays the partner for his investment, so the exit doesn’t wreck the business

• Non-compete clauses, usually requiring a partner not to take clients or compete with the firm for a set period as a condition of withdrawing a full share of the capital

• Spousal divorce provisions, establishing valuation and installment payments if a spouse of one of the partners receives part of the company in a divorce settlement.

Partnerships also need financial controls to prevent embezzlement, a surprisingly common problem, Baker says. The problem typically begins when a partner uses company funds for personal purchases, expecting to reimburse the company later. To prevent that, a partner who doesn’t handle day-to-day finances should review bank statements and credit-card bills.

“People don’t want to talk about some of these things because they’re unpleasant, especially exit strategies,” Baker says. “But if prospective partners can’t agree, that can be a real sign of trouble ahead.”

Left unaddressed, slight disagreements can escalate into business crises that devastate employees and trash professional reputations. Baker says it’s better to discover those discrepancies before the ink dries on the partnership agreement.

HOW December 2000