I’m running a small business with a friend as an hourly employee.
We’ve discussed changing my operation from a sole proprietorship to a partnership.
I can’t find any real good books on the logistics of doing this… how do people account for money that one partner has already poured into a business before it takes a partner?
I’ve got a million questions on this process.
Anyone willing to point me to some good resources?
Give some warnings?
Recount some anecdotes?
Thanks!
I haven’t done it, but… how do you currently account for the money you’ve already put in? You should start from there, from what I remember of my “entrepreneurs courses”. If you don’t know how much capital have you spent, you don’t know the value of your business (which includes other variables as well). You will need to take other things into account, like how to split the propietorship (50:50? 51:49? Other?)
I maintain an inventory that lets me track my cost of goods sold, as well as your standard handy-dandy double-ledger book-keeping in Quickbooks.
My books are adequate to determining the value of the business.
I have not done it personally, but the old adage that two people don’t own a business 50%-50%, but rather 51%-49%, has been very true in my observations.
You don`t want to determine valuation from some book value. Your financial statements should be useful tools but whatever valuation you both agree on is reasonably fine. The only caveat to that would be if the new partner was getting ownership as compensation for their work with you in which case the IRS wouldn’t let you get away with a de minimis valuation.
Is your employee considering putting in cash to buy their way in or are you thinking of giving them some ownership as consideration for their hard work and continued work?
The prospective partner is largely offering labor, not cash.