By Adam Atlas
Attorney at Law
It typically takes more that one person to build a successful ISO. Bringing in a second person raises the issue of how to legally structure a business that has more than one owner. This article highlights common methods of building multi-owner ISO businesses and addresses key issues related to such ventures.
Imagine two partners: Mr. Cash, who brings money to the table, and Mr. Sales, who brings industry experience and the ability to sell. Let's say Cash wants to invest $100,000, and Sales intends to work full time on the project. Also, they each plan to own 50 percent of the business.
One traditional form of organization for a business with more than one owner is an incorporated company in which each owner holds some of the company's shares. For the Cash and Sales venture, Cash and Sales would each own 50 percent of the company's stock.
Cash would acquire his shares in consideration of his financial investment; Sales would acquire his shares in consideration of work he promises to do for the business.
The company is a separate legal entity from each of its stockholders. With a number of important exceptions, such as fraud, stockholders are not liable for the acts of a company they own.
In terms of liabilities specifically related to the merchant acquiring business, some ISO agreements may require the stockholders to guarantee the obligations of the ISO business; others will not.
Cash and Sales should take time to plan for various events that may bring their different, and likely conflicting, needs and opinions to light, for example:
There is a long list of other issues that can arise between stockholders. Most corporate lawyers will be able to propose a general form of an operating agreement and then tailor the form to meet specific business needs.
The term "partnership" is used to describe many forms of relationships, and not all of them are partnerships in the legal sense of the word. A partnership, put simply, is an agreement by which two or more partners agree to share in the profits and losses of a business.
Law firms are often organized as partnerships in the personal names of lawyers, so that all the partners become personally liable for the wrongdoing of their partners. In an ISO project, Cash and Sales could decide to be partners and share equally in the profits and losses of the business.
A partnership is usually evidenced in writing between the parties and need not involve the issuing of stock. Unlike a company, a partnership involves the personal liability of both Cash and Sales, unless they use companies to hold their respective partnership interests.
In forming a partnership, Cash and Sales will want to consider the various scenarios contemplated in a typical stockholder agreement and decide which clauses should be worked into their partnership agreement.
I am not a fan of partnership agreements for ISO businesses unless the parties are sophisticated and understand they may each become fully liable for the liabilities of the partnership, including those caused by the other partner if said partner does not assume responsibility for them.
If Cash is involved only to supply money, it may be simpler for Sales to get a loan from Cash rather than complicate the matter by issuing stock to Cash.
Naturally, Sales should expect Cash will want to take a lien on the ISO business that is borrowing funds under the arrangement. Cash may also wish to be party to the ISO agreement as another way of securing some of his rights to be repaid on his investment.
Rather than complicate matters with equity, Sales may simply want to refer merchants to Cash for Cash to board on his own ISO agreement. This kind of relationship is a traditional agent or referral relationship, but it is upgraded to include financing of Sales' business either by established payments from Cash to Sales or by advances from Cash on future residuals.
Partners should retain a qualified accountant to help in the structuring and administration of the business. Depending on the new entity's form, the tax implications for the partners and for the entity itself could be different. Input at the early stages is critical, as changing the structure at a later stage could trigger unintended tax liabilities, such as tax on capital gains for the transfer of shares.
Whatever form of association Cash and Sales choose, it is imperative that they establish rules protecting their merchant portfolio from one another's wrongdoing. For example, if Cash poured a significant amount of money into the ISO, and Sales used it well to build a large portfolio of merchants, Cash would want Sales to be prevented from moving those merchants to another processor because it would deprive Cash of a share in the residuals from those merchants.
The issues a partnership between Cash and Sales bring up are too numerous to list or analyze in one article. There are also a number of structures for relationships between partners that I have not had space to explore here.
It's important for partners to devote time to discussing their visions for any proposed venture and put on paper some rules of engagement to help both parties draw the most from their respective investments.
In publishing The Green Sheet, neither the author nor the publisher is engaged in rendering legal, accounting or other professional services. If you require legal advice or other expert assistance, seek the services of a competent professional. For further information on this article, email Adam Atlas, Attorney at Law, at firstname.lastname@example.org or call him at 514-842-0886.
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