March Madness: Writers’ Guild Stuff; Forming Sound Partnerships or Dissolving Them

March 17, 2008 on 7:30 pm | In Uncategorized | No Comments

It is hard to believe that March 2008 is half over. The year is shaping up to be a year of content but also a year of new beginnings. After inserting and then removing myself from various Writers’ Guild related projects, I have happily found new beginnings in a project that calls upon forming sounding partnerships. While I’m on that topic, I’d like to go over some basic does and don’ts that often require repeating:

1) Partnerships are everywhere. Any two people doing business together, or any two entities doing business together that have not formed a separate corporate form, as “partners.” Yup, it’s that simple.
Subchapter K of the IRS Code will dictate how income is characterized as well as the treatment of distributions to and from the “partnership.” I won’t get into the state law requirements of filing requirements, or the lack their of. BUT, if you’re in business with another and you haven’t formed a C corp, S-corp, or LLC as the operate your unit, welcome to partnership. Many of you will scoff at the reality that I’ve called your work with that person sitting in the office next to you, a partnership and may continue in denial, but trust me, your in a partnership and if you don’t take it seriously, things may turn out tough.

2) Partnerships require a writing. No, there isn’t a law that requires a writing. Rather, there is a rule and it is called the rule of good sense. A simple writing is imperative to describe (a) how decisions shall be made about day to day and big decisions; (b) how net income will be allocated; (c) how and who will pay for expenses; (d) what happens when one of the partners wants out, a new partner wants in, or one of the partners goes away (e.g. death); (e) a writing IS however required to get any copyrights into the partnership and other property that will be the basis of the partnership’s business; and (f) competition and moonlighting. Will the partners allow each other to do “non-partnership work” or are all energies to be devoted to the partnership.

Red Flags. This is not a sailing reference. By this I mean, items you should consider reasons for not joining with another, reasons for getting out of what you know to be a partnership or reasons to quickly attempt to mend fences before things get out of hand.
- Single signor of bank account and single reviewer of accounts payable. While it is great to have one partner run the books, all partners must be informed by way of monthly reporting of uses and sources of cash. Unless you know why certain expenses are being incurred and how they flow into creating the top line, get a handle on the finances of your partnership asap.

- No meetings. Meetings for no reason are a waste and meetings when things are sailing perfectly seem to be a waste too BUT if you only meet when there is a problem or your partner won’t meet with you unless there is a problem, there is a problem. If no meetings are not your problem the point of this item is that personality conflicts, inability to talk to each other about the goals, plans and strategies of working together on a regular basis will make decision making incredibly difficult down the line.

- The Veto Partner. Partners that veto every idea brought to them are a red flag. Wait until it comes time to distribute net proceeds or increase a draw. If “veto”, as I’ll call him/her, also runs the books, this is double trouble. Unless of course, you were brought in to be a junior partner and have little expectation of making any decision until Veto retires.

- Income distribution not clearly understood. Like most businesses, a partnership distributes netincome after expenses. Each partner however generally receives a draw on income EXPECTED to be obtained by the partnership. Thus, it is technically a draw against future income. If this month you draw $10,000 but your net income allocation this month is less, you are in the negative. That is the easy part. Every partnership (nearly) determines net income differently. Some are origination based, some are hours worked plus origination based, to compensate service partners who do the work brought in by the origination-based rainmaker partner. If you cannot easily determine how income is distributed, do not take that ignorance as bliss. Sit down with the CFO or the partner of the firm that manages the books and have them walk you thru it. Are you able to be successful in that model?