Too often, business partnerships do not work out as expected, and breaking up a business partnership can be as difficult as a nasty divorce. Or not.
Potential Risks
Partnership relationships have serious personal liability risks. Under the law, partners are jointly and severally liable for the actions and debts of the partnership. This means that you can be personally liable for the actions of your partner.
So, if you are going to join forces with another person or company, you want to do due diligence on your “partner” and carefully structure your agreement to reduce risks. You should also consider setting up a legal entity such as a LLC (Limited Liability Corporation) or incorporate to limit your personal liability.
The possible reasons for a business "divorce" are many:
- Different values and work ethic;
- Disagreements about money and decision making;
- Disagreement about the direction of the business;
- Desire to live in another climate;
- Changed circumstances such as death, disability, divorce, insolvency, loss of professional license, conviction of a crime; or
- Desire to pursue other interests or retirement.
If the foundation for a buyout or business closure is put in place when everyone is calm and friendly, an orderly transition is much more probable when the time comes.
No matter how great your business relationship is, however, it's inevitable that - at some point in time - you will need to manage a transition of ownership. The absence of an agreement can lead to costly litigation with an uncertain outcome.
Elements of an Agreement
The process of putting your agreement in writing helps to build a stronger working relationship and reduces the potential for conflict. The process helps to clarify roles and expectations about how money will be spent, decisions made, and priorities set. Many potential disputes or disagreements may be resolved - in advance - by the process of putting the agreement in writing.
The agreement is really an opportunity to agree about how the business will operate. It's also an opportunity for shareholders to protect themselves and make sure that major decisions, such as sale of the business, issuance of additional stock and borrowing money, require more than majority approval. The agreement can specify that certain decisions require a specific percentage of the partners approving, e.g. 51% (to avoid a 50/50 stalemate), 75%, or unanimous. Obviously, the number of voting partners involved will impact the approval requirement.
Including provisions for dispute resolution in your agreement is a smart move. Alternative Dispute Resolution (“ADR”) runs from informal and non-binding “mediation” to binding “arbitration.” ADR is faster and less expensive than going into court for resolution, and your agreement can define the valuation methodology and buy-out process. In the absence of an agreement, ADR can still be a cost-effective way to resolve such disputes.
Bottom Line:
Take the time to put your agreement in writing! The absence of such an agreement can leave you with a nasty dispute, the resolution of which can be lengthy, costly and exhausting.
NOTE: Information provided is intended as a broad, general overview and is not legal advice.
© Copyright, 2009, Jean Sifleet. All rights reserved. Used with permission.
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About This Author:
Jean D. Sifleet, Esq. CPA, is the head of the Business Practice Group of Worcester. For practical information, check out Jean's articles and books which are featured on SmartFast.com.
