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Business Partners Should Talk About Breaking Up First

Handshake between business partners.

Talk about your business relationship, reduce it to a written agreement, sign it, then get to work with your partner.

When assisting business partners form their entities or when my litigation partner is consulting with me on a case I see the following scenario often:

A business partnership starts with a money person and an idea person. The idea person has a fantastic business plan and the money person has the cash. They think it is perfect. They rush to form a LLC or corporation, downloading an Operating Agreement or Bylaws from the Internet. It even might be worst, they do not even bother with a document. After that, they are running their business, but then several months into it they are fighting.

What do Business Partners Fight About?

Usually, they do not see eye-to-eye on major business decisions.  Decisions like:

  1. how much money should each person contribute;
  2. who has the authority to sign checks or what is the dollar limit each partner has for contract obligations;
  3. where should we locate our offices;
  4. when do we pay ourselves;
  5. what happens when one of us wants to leave; and
  6. so many other issues …

Business owners hate hearing this from their attorneys: slow down! They should be deliberative in their collaboration with their business partner. I sometimes remind people that getting a business partner is basically getting married. Also partnering with a friend is different than being a friend, you sometimes do not know their work ethic. This is why we urge business owners to get things in writing with their partners.

The goal when drafting Operating Agreements, Bylaws, and employment agreements* should be what are the processes that governs decision-making, what happens when there is disagreement, or if an owner wants to leave, etc. … Basically, preempt the fights by setting up contractual arrangements. *By the way, if an owner of a business wants to contribute work instead of capital, then the partners should consider an employment agreement. It is solely not just for contract law purposes, but for tax and accounting issues.

Business partners think that their idea will be a money-maker and that their partner is going to make it happen.  They fail to calculate that even in success that their business partner may have other ideas on the direction of the business.  There is nothing wrong with differences of opinion, but when decision-making is paralyzed it could stop the business from moving forward. Further, for its employees, vendors, and service-providers, knowledge of an ongoing dispute amongst the business owners can make them question the survivability of the business.

Protect your Business Relationship by Communicating

It is easy. Talk about it, come to an agreement, and then get it in writing before the business starts. Many people just want us attorneys to give them their documents or download their own forms for the Internet. They think it saves them time and money.  I’d contend that is the wrong way to look at it. The time and money spent on your governing documents is an investment in the relationship. They are a contractual foundation.

If not, you are just pushing disputes to a later date. Consider that when the money has been spent, you’ve worked countless days and nights, and now you are arguing.  Then you realize all you have for your contract rights is a poorly drafted document … or worst yet, you don’t have one at all.  So do yourself a favor, have the conversation now and plan for the future.  Communicating when you are on good terms with a partner is easier, then when you are fighting.

DISCLAIMER: This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained in the post without seeking the advice of  an attorney in the relevant jurisdiction.  Hew & Bordenave, LLLP expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

Draw the Law: Sole Proprietors and Partners

Draw the Law” is a weekly short post where I try to visualize a legal concept.  It is designed to be helpful to the laymen and for a quick understanding.  For the next several posts I will be detailing organizing and operating a business.
In the prior post in this series we talked about how in a corporation or limited liability company (LLC) a business owner’s identity is separate from the organization.  Today we will focus on the other type of ways one could organize a business, namely a sole proprietorship or partnership.

Flying Solo: Sole Proprietorship

Quick, easy, and simple that is a sole proprietorship.  One day did you decide to make things and sell them online?   You are a sole proprietor.  You are the business and the business is you.  Unlike, the LLC and corporation there is no separate legal entity status, and why?  Consider the fact that you did not take steps to formalize such an entity and because of it you need not do any of the formalities associated with corporations and LLCs.  One of the basic formalities that you may have to do is register a “Doing Business As Certificate” if you are utilizing a name other than your own to conduct the business.

The Ugly Side of Sole Proprietorship

Without the limited liability shield your business assets and obligations are not separate from your personal ones.  Your stuff will be used to satisfy debts and other liabilities of your sole proprietorship.  Your home, personal savings, car and everything else you own could be used to pay for a court judgment or creditor claims.

To highlight how personal assets become entangled with a sole proprietorship consider the situation if you are married.  You and your spouse’s stuff that are owned together are all personal assets and therefore, they would be used satisfy debts and claims.  It would be hard to say, which things are exclusively yours when you jointly own many things together.

It Takes Two to Tango: Partnerships

In the case of a general partnership it takes two or more persons, who have not incorporated, and are carrying on a business for profit as co-owners.  If all these conditions are met you are in a partnership even if you did not intend or know it.   No formal documentation is needed, all you need to is work together with another person, and try to make some money, and you will be considered in a partnership.

Similar to the sole proprietor of a proprietorship, each partner in the general partnership has unlimited liability for the debts and obligation of the partnership.  However, in the case of the sole proprietor it is just the one person on the hook.  In a partnership each general partner’s assets can be used to satisfy a debt or obligation even if that partner disagreed with transaction that led to the debt or obligation.

Limited Partners, Limit their Risk and Work

However, there are ways to limit liability.  In a limited partnership, there must always be one general partner and one limited partner.   The limited partner gets all the benefits of limited liability, but loses out on the ability to manage the business.  They cannot actively manage the business.  As you might have guessed, this kind of relationship needs to be filed with the state through a certificate of limited partnership.  In addition, the partners should have a documented partnership agreement detailing their arrangement, which an attorney can help you with.

 

Now you know all the types of business organizations that exist.  They are as follows: sole proprietorship, partnership, corporation, and limited liability company.   Next time I will do a quick recap of the four different types, highlight some interesting features, and the time after that we will get into the laws that may affect the operations of a small business.

See you on the next draw!

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.   No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.   Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.