Legal Question in Business Law in California

Re: new company

Most lawyers (including me) discourage doing business as a partnership. There are just better ways to set up a business in the 21st Century. A partnership is the default form that occurs automatically when two or more people go into business together with an understanding that they will share the profits, whether or not the call it a partnership or whether or not they have an express agreement. The problem is that there is unlimited personal liability by every participant for all the debts and liabilities, including those created without your knowledge or approval.

Partnerships have two advantages: ease of creation and no franchise tax. With a corporation or LLC, you have to file a simple document with the Secretary of State to cause it to come into existance, and you have to pay a minimum annual franchise tax to keep it in existence. Beyond that, I know of no advantages and can think of plenty of disavantages to using a partnership versus an LLC or corporation. By the way, you may have heard of "S" corporations and "C" corporations. At the time you form a corporation, it is de facto a "C" corporation, the default kind; changing it to an "S" corporation is a tax election you make by filing a form with the IRS.

The people who get together to start a corporation or LLC would be better off thinking of themselves as "founders" or "promoters" rather than as partners in the business. After it is formed, the participants in a corporation will be shareholders and probably directors and/or officers. LLCs, on the other hand, have members and managers, and the categories overlap; frequently, all members are managers and vice-versa, but not necessarily.

The founders of a business that is to receive $70K of cash investment need a formal agreement as a matter not so much of law but of common sense. It could be captioned "Agreement Among X, Y and Z for Founding ABC Corp." or the like. There are probably dozens of topics that should be covered, including amount and timing of money investments, who will be the initial directors and officers, salaries if any, buy-sell agreements re stock, adoption of bylaws, location of the headquarters, anti-dilution provisions, who will work in the business and how much, and so on.

The three of you should acquire some basic business formation and operation knowledge, including record-keeping and tax savvy. Consider buying one or more of the popular paperback how-to books on small business setup and operation, or ask at your nearest SBA office.

My recommendation is

Re: new company

Corporations and partnerships are distinct types of entities. Corporations do not have partners and thus do not have partnership agreements. You and the other three investors should probably hire a lawywer to help you decide what type of entity you want to create and to create it properly for you.

Re: new company

There are no partners in a corporation, there are shareholders. You can set up the split any way you want. I never allow clients to enter a partnership, because of the unlimited liability for every partner's actions.