Structuring Your Business Properly is Critical to Your Success

When you first start your business, you may be the only member of your company. However, as you grow, you are going to need to find financial partners and business partners to take your business to the next level. You need to know how you are going to involve these people and how you are going to compensate these people before you bring them into your company. If you have already determined how you are going to structure your partnerships, it will make it that much easier to entice your potential partners to work with you.

The first thing that you need to decide is what kind of entity are you going to use? You need an entity that will provide you with the best form of asset protection and financial benefits. Reach out to your accountant and your attorney and find out what they recommend for your entity type. Do a little research before you talk to your team. You want to be able to have an educated conversation.

When you talk to your attorney find out what the best form of partnerships are going to best for your situation. Each partner may need a different form of partnership depending on their situation. If you have a great idea on what types of partnerships are available, you will sound more educated when you talk to potential investors. You will also be able to quickly pivot or offer alternatives if you feel that your investor is suggesting a bad alternative.

Next, you need to decide who you need on your team. Every person is going to have a different role. Some of your partners may want to have an active role while others will want to be silent partners. You need to know your partners’ experience levels and how they make decisions if they are going to be active participants in your business. Do you even want anyone who isn’t a silent partner unless they are your mentor?

If you do allow someone to be an active partner, you do not want to give them a majority position in the company. What if they make a decision that contradicts what you want to do. You need to always maintain a 51% ownership position so that you always have the final say in what happens. However, if you are going to do this, you need to make sure that you have the education and experience necessary to make the right decisions. If you don’t partner with a mentor who can help you get to where you need to be.

You need to determine how your profit sharing is going to work. If you don’t know how you are going to compensate your investors, how can you sell them on working with you? Are you going to cash out your investors when you sell the property? If so, what percentage of profit do they get? How do you determine that? If they are going to reinvest with you, do they get a bonus on the next property? If you are planning on buying properties and turning them around over a 3 to 5 year period of time, you need to make sure that your investors are aware of the timeline. They need to know that this isn’t like wholesaling where you turn a property in a few months.

Finally, you need to start creating a way for your investors to make money by referring other investors to you. Are you going to give them a flat fee for sending you partners? Are you going to give them a percentage of the profit that you make with that new partner? You want them to feel like they won’t be missing out if they help you grow. They don’t want to feel like they are going to get left behind. The best way to do that is to offer them some form of compensation for sending you referrals.

By laying out the structure of your business before you need it, you will be in a better position to add partners to build your business. You will be able to sell your business because you will know what you have to offer. Take the time up front to create the structure. As always, happy investing.