Business partners can bring factors into your organization that can temporarily or permanently damage your business and your business relationship. Understanding how a business partnership works and how planning, cash management and control, handling disagreements and spousal interference can negatively affect your business is valuable information to have if you are in a business partnership or are considering drawing up a partnership agreement.
Law-related Business Topics from Dain Dulaney
So, you and your partners just started a new business. The future looks bright, everyone expects the company to grow into a huge success. This may be the case and while some business partnerships end on a positive note, most see their share of ups and downs. At least once a month, partners in a business come to me because they have a major problem and no way to resolve inevitable major issues between themselves. These issues occur to healthy, even strong businesses, as well as those that are struggling. I want to give you a few tips I have learned for dealing with these issues:
Failing to Plan is Planning to Fail
As I was preparing to write this, I received a call from two partners that own a gymnastic and cheer training center. They bought the business, wrote out a clear business plan but did not get around to finishing up a partnership agreement (also called an Operating Agreement, if the company is an LLC or a Shareholders Agreement, if the company is a corporation or s-corporation). While the business has been doing well, a life circumstance of one of the partners changed and all major decisions in the company began to be questioned. Since they had no partnership agreement, I had no way to help them other than going through a long, painful and expensive negotiation process that diverted time and resources away from their business, almost ruining a successful business. All of this could have been avoided with a partnership agreement that put in place procedures to deal with these inevitable issues at the beginning of the partnership when the partners are getting along and all business prospects seem endless.
Cash and Control
The most critical decision that owners address in the partnership agreement is how money will distributed between the owners, both if the business is successful and if it is not. This takes thoughtful planning, determining each partner’s contribution to the business and what is fair given the skill, money and time each owner invests. Equally important is who has ultimate decision making authority in the business. This does not have to be the same answer as who makes the most money but the partners need to agree up front on how decisions will be made and who has ultimate authority, perhaps even carving out certain major decisions where there always has to be agreement by all the partners. Most importantly, these issues have to be accurately addressed in the partnership agreement, so that as issues arise, there is a clear path to determine the answers.
What if We Disagree?
If you are equal partners and there is a disagreement on a major decision or, when there are more than two partners and one of the partners vehemently disagrees to the direction of the business, the company is deadlocked and the inability of the partners to find resolution threatens the ability of the company to continue. There are numerous ways to plan and address these issues, including adding a provision in the partnership agreement that provides for the use of a third-party mediator or advisor to mediate the dispute or an ultimate right of the partners to buy each other out. Having these clear processes put in place up front can mean the difference between continuing in business or liquidating.
I Went Into Business With My Partner, Not His Wife
If you do not have a partnership agreement and your equal partner meets an untimely death, his heirs (for example his wife) become your new partner. Now the widow gets 50 percent of the profit and the right to make decision but never contributes even a day of work. How could this have been avoided? Every partnership needs buy-sell provisions to allow the remaining partner the opportunity to purchase the other partner’s ownership in the event of an unplanned transfer of that partner’s ownership: including by death, disability, divorce or bankruptcy. You may be fine with your partner’s next of kin participating but you should have at least the option to make that decision.
These examples touch on only a small sampling of the issues that can arise between business partners. Effective planning, a properly drafted partnership agreement and instituting the right provisions in advance enables a company to survive even the worst of circumstances, while treating the partners equitably in the process.
Dain Dulaney is partner with Bishop Dulaney & Joyner, P.A., Attorneys at law
Mr. Dulaney has a broad general corporate and transactional practice developed both through extensive in-house and large firm experience. His practice focuses on providing practical legal advice to help business owners decide how to structure and finance their start-up, assist with the purchase and sale of businesses, prepare shareholder and operating agreements and implement employee option and bonus plans. You may contact Mr. Dulaney directly at email@example.com.
©2013 Dain Dulaney
This paper includes information about legal issues. This material is for informational purposes only and may not reflect the most current legal developments. This information is not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. You should contact an attorney for advice on specific legal problems.