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Business partners in love

Before you and your spouse start a joint venture, protect your finances - and your relationship.

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By Karen Cheney, Money Magazine contributing writer

jensen_pelletier.03.jpg
For Jensen (right) and Pelletier, running a business together seemed like a natural. They had worked together in the late 1990s, when they both put in 60-plus-hour weeks as consultants.
SUBMIT
Building a better partnership
Jensen and Pelletier need to attend to some small business (and marital) basics, according to DeDe Jones, a financial planner in Denver, and Becky Stewart-Gross, co-author of Sleeping with Your Business Partner.
1. Set up retirement plans.
Jensen and Pelletier have put savings on hold to reinvest in the business. Jones recommends that they fund Simple IRAs, which would allow each of them to save $10,500 this year, tax deferred. As their business grows, they might want to switch to a 401(k), which is more expensive to run but would allow them to save far more each year.
2. Draft a buy-sell agreement.
If one partner decides that he or she wants out of the business someday, this legal document will specify what price will be paid for a partner's shares or interest and who can buy those shares. "It's important to ask, 'What would be a graceful way to end this?' and then document it," says Jones.
3. Go on a date.
Want to avoid ever having to implement that buy-sell agreement? Take a little time off. It's been nearly two years since Jensen and Pelletier had a getaway, so Stewart-Gross urges the couple to take a long weekend off ASAP. "Next year, make it at least a week," she says. It may be the best investment they make in their marriage and the business.

(Money Magazine) -- For Jessica Jensen and Jason Pelletier, running a business together seemed like a natural. They had worked together in the late 1990s, when they both put in 60-plus-hour weeks as consultants, helping other companies figure out better ways to run their businesses.

They had complementary skills - hers in marketing and sales, his in environmental sciences. And they shared a vision to do something good for the earth. In sum, they knew they were perfect business partners. And, oh yeah, they happened to be married.

For many would-be entrepreneurs, the most natural person to work with is a spouse who shares values, goals and interests. But while a new business is a risky proposition for anyone - only 44% make it to the four-year mark, according to the Bureau of Labor Statistics - the stakes are far greater for a married couple.

If the business tanks, your family's fortunes may as well. If you let business disagreements become personal, you stand the chance of wrecking your marriage. And with the success of your business depending on the strength of your partnership, if you and your significant other split, your business might go down the tubes too.

As Jensen and Pelletier can attest, running a business in your home, like running a marriage, isn't all champagne and roses. In 2006 the pair severed their ties with the corporate world and used $100,000 of their savings to launch LowImpactLiving.com, a website that helps consumers find information about products and services that are good for the environment.

Though the business is now running solidly in the black, the couple, who used to bring home a combined $400,000 a year, opted to pay themselves just $90,000 last year. While that's hardly starvation wages, it covers little more than their basic living expenses, including the $2,800 mortgage on their Spanish-style Los Angeles duplex. They've eliminated travel and eating out and have stopped saving for retirement altogether.

They also haven't taken more than a partial day off in a year. "We don't want to continue living like this much longer," admits Jensen, 36. Plus, the possibility of financial failure nags at them all the time. "We have all our eggs in just this one basket," says Pelletier, 37.

If you're contemplating a start-up with your spouse, by all means, give it a shot. Just take prudent steps to reduce the stress and protect both financial futures. It comes down to making sure that you launch your business the right way.

Start slowly

As eager as you may be to get your business up and running, you'll temper the risks you're taking as a family if one of you holds on to a corporate job for a while.

"Have the lower-income person take the leap first," advises DeDe Jones, a financial planner and accountant in Denver who specializes in working with entrepreneurs. That way you'll keep one steady paycheck and family health-care benefits until your business is off the ground.

Rent is likely to be one of your biggest expenses, so try to use an attic or garage as a temporary work space until your business is bringing in enough cash to pay for an office. Jensen and Pelletier, for instance, spent a year working in their guest bedroom before renting office space and hiring their first two employees.

Assemble the right paperwork

You likely have a business plan already, but you should also draft a document that lists what jobs each of you will be responsible for. Who is in charge of paying the bills? Which of you would discipline a chronically late employee?

"Give yourself a title and write a job description," says Ruth Hayden, a family business counselor and author of "For Richer, Not Poorer: The Money Book for Couples." "It's one way to avoid stepping on each other's toes."

You'll also need two legal documents. The first, a partnership agreement, should outline job responsibilities, the amount of profits each of you will take and how you'll handle disputes. Also consider spelling out which of you would have veto power in case you've completely locked horns. The second, a buy-sell agreement, is like a business prenuptial. It should say whether one of you would buy out the other and who would inherit the company in the event of divorce, disability or death.

Make it fair

If you do go your separate ways someday, you won't want to have lost ground in your own career or retirement savings. It's a bigger problem for women: All too often, couples working together fall into stereo-typical gender roles, with women doing the bulk of the support work, says Kathy Marshack, a psychologist and author of "Entrepreneurial Couples: Making It Work at Work and at Home." So keep developing skills that you could later apply to a corporate career.

And pay both partners a decent wage. "I am still shocked at how many women in these businesses agree not to take a salary," says Marshack. Some couples opt to pay one spouse far less than the other to save on self-employment taxes (currently 15.3%), but if you forgo an income, you'll reduce the size of the Social Security benefit that you're entitled to - and you'll undermine your sense of worth in the business.

Build a life raft

While you'll almost certainly use some of your savings for this venture, betting everything you own on the success of the business is a huge risk when it's your family's sole source of income. Since you can't expect severance benefits if the business fails, you need a larger-than-normal emergency fund. Three months' worth of living expenses in cash is usually enough for two-income families, but an entrepreneurial couple should have at least six months' worth of personal living expenses in the bank, says Hayden, as well as two months' worth of business expenses in case a client pays late or a job doesn't come through. You may want to open a home-equity line of credit as a backup - but raid your home equity only as a last resort, says Jones.

And since neither of you is funding a 401(k) or building up a pension, open Simple IRAs or a self-employed 401(k) plan; the latter will let you stash as much as $46,000 this year ($51,000 if you are 50 or older) in tax-advantaged accounts.

Finally, make sure that if your business falters, your family's assets aren't on the line. Talk to an accountant about setting up a corporate structure such as an LLC, which will help shield your personal property from creditors if your company fails. Having separate bank accounts and credit cards for home and work will reduce the chance that the IRS will look at your home records if you're audited. Plus, it'll help you keep track of business expenses and income.

Keep the blackberry out of the bedroom

It's tempting to talk shop 24/7 when you live with someone who shares your passion for the job. But if you don't take care of your marriage, says Hayden, your business is likely to fall apart too. If you're working at home, try to create a separate office or work space. And establish some rules, such as no business talk after 7 p.m. or during meals. You may also want to set up regular weekly meetings - one for business affairs and one for personal issues.

Jensen isn't thrilled when Pelletier interrupts her sleep at 11 p.m., toothbrush in hand, to share another business idea, but she accepts it as the price of an otherwise ideal partnership: "There is no one you can trust more than your spouse and no one who will work harder."

Are you on track for an early retirement? Tell us why at millionaire@cnnmoney.com. Include your financial details and your family could be profiled in a future column of our Millionaire in the Making series.  To top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.