There comes a point in the existence of many construction companies when the owner may want to bring in a partner. This is usually a good sign – the company is probably growing and there’s just too much work or opportunity for one person to handle.
If you find yourself in such a situation, be as patient and choosy as possible when picking your partner. And make sure you know, well in advance, how this change will affect your construction company’s tax liability.
Essentially, there are two major facets to choosing a business partner: strategic and financial. Let’s start with the strategic. Obviously, adding a partner isn’t something one should do on a whim or just because you enjoy working with a fellow contractor. Doing so has got to be part of a well-conceived, carefully planned strategic expansion of the business. Ask yourself questions such as:
- Where do I want to take my company that I can’t get to on my own?
- Can a partner help me get there – or just slow me down?
- Do I need a partner, or is an employee or consultant the better choice?
It’s particularly important that any prospective partner complement you. Remember, the word cuts both ways. Of course your partner can’t be someone too different from you – he or she must share your values and overall approach to doing business. But a partner must be significantly different from you as well. Ideally, he or she needs to excel in one or more areas in which you tend to struggle.
A typical problem in partnerships occurs after two people unite because of a common skill or passion in a certain area. Unfortunately, they end up competing over the work involving that skill or passion. So if you’re a “hands-on, work-at-the-jobsite” kind of owner, a partner who excels in, say, technology or sales might be a good fit.
Then there’s the financial side. You’ll naturally have to establish salary levels, benefits, and a sound and efficient approach to sharing financial information. But it’s tax liability that can often sneak up on new partnerships with unpleasant surprises.
For tax purposes, partnerships are “pass through” entities – meaning that income passes through to the owners’ respective personal tax returns. Partnership income may also be subject to employment taxes. And this particular business entity choice doesn’t protect personal assets from creditors – if an owner is a general partner. Limited partners are liable only up to the amount of their investments.
For these reasons – and simply the fact that construction projects expose contractors to so much risk and liability – forming a limited liability company (LLC) may be a good idea. LLCs are, by default, taxed as partnerships. So they’re also pass-through entities. But LLCs shield owners’ personal assets from business-related debts and court judgments. In fact, for larger or more risky projects, some construction companies set up an LLC specifically for the job in question.
Carefully Made Move
Aside from selling your construction company, bringing in a co-owner is among the most impactful changes you could make. That doesn’t necessarily mean it’s a bad move; it’s just got to be a carefully made one.
We welcome the opportunity to put our construction industry expertise to work for you. To learn more about how our firm can help advance your success, please contact Dave Wolfenden at (302) 254-8240.