RACO Investment founder Randall Castillo Ortega discusses partnerships in startups

If you are thinking about entrepreneurship, but do not understand what it means to do it alone or with partners, there are a lot of things to consider. This is a common question among entrepreneurs, whether you have a startup, a food delivery business from home or you are going to provide a service. Randall Castillo Ortega, the founder of Central American SME lender RACO Investment, discusses forming business partnerships in a startup and what needs to be laid out in complete detail.

The Partners Agreement is the ideal document for its flexibility and binding nature, as a private contract between the parties, to regulate the operation of the company through a Company and the relationship of all the members of the entrepreneurial team in their capacity as Partners.

A Partner Agreement, like any contract, can have a greater or lesser complexity depending on what it intends to regulate and the type of negotiations prior to its formalization. The clearer things are among the members of the team, the more fluid the process of drawing up the contract, becoming merely one more step to formalize their association.

Determining the roles that each member will perform, as well as the objectives they will have, is closely related to the above point. It is important that the entrepreneurial team knows what the functions of each one are. In this sense, it is possible to establish certain objectives for members who play certain roles, for example, for the future partner who will play the position of Commercial Director with initially 10% of capital in the company, could be subject to the fulfillment of two objectives to be met in the first and second year of life of the startup, through which, its fulfillment will mean an increase of 5% more than its initial participation in the company.

“The standard recommendation in agreements similar to the previous example is to establish objectively quantifiable milestones and agree how the partner will acquire the new percentage of shares, either through a sale or assignment of shares and specify from whom the additional percentage will come,” states Castillo.

It is not easy to navigate the path of creating, registering or formalizing your company or business. There is no disadvantage or advantage to doing it individually or with partners. The decision is mostly determined by whether you want to do it accompanied or individually. To undertake alone, the most common options are the Simplified Tax Regime (STR) and the Sole Proprietorship (SP). The Simplified Tax Regime is designed to make filing and paying your taxes simpler and cheaper, but it has special requirements to be able to register under this modality.

If that alternative does not fit your business, the next best option is to open a single-person company that has no investment limits; you can hire employees and has no limits on the unit price of your products. Want to know what it’s all about? Here we answer you in detail about what is a one-man company. Explains Castillo, “As for the options to start or create your company with a partner, the most common is the Limited Liability Company (LLC) but also the Public Limited Company is a legal alternative but higher costs.”

It’s common to hear that having a partnership is going to result in higher taxes. This is not the case. With few exceptions, including small traders and artisans without partners, all other types of companies are taxed in a similar way, whether it will be an LLC, an STR or a Sole Proprietorship. An easy way to think about taxes is that they will be proportional to your sales and operations. There are exceptions, obviously, but for the most part, the more sales you have and the better you do, taxes come into play, and not the type of company you have.

The times to register any of the options to undertake individually, are less than those to form a company. However, not much less. If you had partners, you must have a partnership.

The final point but probably the most important, is that it is advisable to have a company if you have partners. This allows partners to manage each other in a more organized manner and to ensure that everyone is equally responsible for the obligations and that they also have equal access to potential benefits. “Some entrepreneurs think about registering a sole proprietorship or RTS despite having partners, and this generates certain legal problems in the medium and long term,” asserts Castillo.

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