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When You Start a Business with Partners, Plan for a Breakup

Author: S. Hayes Edwards Jr. Date: 11/21/2014

Categories: Business Startups, Corporate and Business Law

Starting a new business with one or more partners is exciting. You’re all full of ideas. The adrenaline keeps you awake at night. Of course, you know there are risks, but the negatives pale in the bright light of optimism.

The last thing you want to think about – and one of the first things you absolutely must – is what will happen if it doesn’t work a year from now or 20 years down the road? The potential disagreements are nearly limitless: Who has authority to hire and fire employees?  Who gets credit if one person brings in a new client?  What if one partner wants to expand and the other wants to downsize?  How are profits – and losses – divided?  What expenses will be reimbursed?  Common circumstances like a sudden influx of money, or a stretch where the cash just won’t flow, can quickly and fundamentally change the way a partner thinks and feels about the business.

An experienced business attorney can help you predict issues and create mechanisms for resolving them efficiently.  For example, your organizational agreement (the contract that governs how the partners will run the business) could allocate decision-making power over certain areas to a single partner.  Or you could appoint a third party, perhaps an attorney who represents the business (as opposed to either individual owner), to “break the tie” on particular issues.  Another example: often partners will enter a joint venture with the expectation that both will contribute a certain type of resource.  To enforce this expectation, the partners could agree that a partner’s failure to contribute as promised would result in a partial loss of interest in the company.  There are many options, but the most important feature of any solution is that the partners truly understand it and agree on it.

In fact, the very process of drawing up an agreement can be a revealing test case for how your partnership will work.  As you go beyond the big idea that inspired the business, you and your business attorney will look at the practical realities of owning, funding and managing it.  The more potential obstacles you can take off the table, the more time and resources you can focus on developing, promoting, and delivering your services.  Of course, you might also start to realize that are fundamental differences that you want to consider before signing off.  The type of person who shares your goals might be the type of person who doesn’t shy away from butting heads.  Now is the time to find out if this partner is the right partner, before your assets and time are locked into the enterprise.

Remember that your goal is long-term success and cooperation—not triumph on a series of small points—so this process should be one where all partners listen and all partners have a say.  Having an attorney in the room who has overseen this process many times can add a valuable perspective and can help you and your partner communicate more efficiently.  An attorney can also draft an agreement that is not only enforceable, but which accomplishes your goals in a precise and efficient manner.

If you are currently planning or anticipating the formation of a new business, contact Hayes Edwards at hedwards@mcmillanmetro.com or 240-778-2329.  My colleagues and I would be happy to assist you in this exciting process.