The Beck Law Firm, LLC Blog: " Hey, Let's be Partners!" or "The ...

For business and entrepreneurial types, it's probably come up some time in conversation with a friend of colleague. ?"Hey, we could do that together. ?Let's be partners" someone might say, as you kick around a new business idea. ?"I'll handle the marketing and the sales, and you can handle the operational side. ?It will be great." ?But will it? ??Folks go into business with others all the time. ?And there is nothing wrong with that, if done properly. ?But businesses fall apart and break up all the time, too. By failing to plan for the high probability of problems that can arise within a partnership, business folks can set themselves up for a significant amount of frustration, as well as costly legal fees and expenses.

Whether they are forming a partnership, a corporation or a LLC with others, I tell my clients that it is not a question of "if" there will be a problem among co-owners or partners, it is simply a matter of "when." With that in mind, some proper planning is in order - while everyone still gets along - to avoid more complicated and costly problems down the road.

Those going into business together need to think through several issues, such as:

* How will we own the business? ?50/50, or 1/3 each with three owners, or some other arrangement?

* What will the roles of each owner be? ?Will everyone be responsible for different areas, or will areas of responsibility overlap? ?Will each partner devote their full time and attention to the business??

* What will we do when we can't agree? ?What if one partner wants to move the business in one direction, but the other is opposed? How will you decide what to do - whether it is to enter or leave a market, a location, make a distribution of profits, close up shop, or something else? ?Is one person vested with ultimate authority, or do we resolve disputes in another way?

* What will happen if one co-owner becomes disabled - either temporarily or permanently? ?What about if someone dies - are the reamining owners then in business with the deceased partner's spouse that no one likes? ?What do we do when one owner wants to get out of the business and sell his ownership interest - or even more challenging - the other owners want to force someone out?

These aren't pie-in-the-sky questions about things that never happen. ?These are practical questions based on events that happen all the time in the life of a small business. ?They can be difficult to resolve. ?But, when these events are planned for in advance, resolving these situations is much easier.

In many situations, the key to these issues is a good buy-sell agreement, sometimes also called a shareholders' agreement (for corporations) or a members' agreement (for LLCs) or a partnership agreement (for unincorporated partnerships). ?This document, combined with the corporation's by-laws or the LLC's operating agreement (if applicable) can set forth procedures to resolve disputes, articulate duties and responsibilities, and deal with situations such as death, disability, or inattention to the business. ?The good thing about them is that they can be customized for your business, to the needs and whims of the owners.

In my experience, many folks will forgo this planning, thinking that everything will work out fine, or that they can do it later if needed, and save a little bit on attorney's fee at start-up. ?But many times, when "later" comes it is simply too late, as the owners are in the midst of a disagreement and are far less likely to agree to terms for an owners' agreement that cover how to resolve disputes and run the business. ?The result is that it is harder to reach agreement on what to do, legal fees may become much larger than they ought to be when everyone lawyers up and looks out only for themselves, and relationships among the parties can be significantly damaged or destroyed. ?That's why I suggest proper planning either before the business commences operation or right after during the "honeymoon" period when everyone gets along.

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