Guest blogger: Dominique Navarro, JD, LL.M.
Most are familiar with the couple who fall in love, get married, build a life, and invest in a house, automobiles, retirement, children, and Fido, the family dog. Unfortunately, we are also familiar with the relationship’s demise as a result of divorce or death. What stems therefrom depends on the couple’s awareness to preplan by executing certain agreements (prenuptial or postnuptial agreements) or estate planning documents (wills, trusts, and healthcare directives).
All too often, however, couples fail to plan ahead, making it unclear who is entitled to the investments, children and Fido. Don’t get me wrong, executing proper documents under these circumstances can be a thorny proposition, but taking a proactive approach is much less costly and time consuming than litigating Fido’s future home.
A business partnership is not unlike a marriage. Partners invest a great deal of time, energy, and resources into a business, and just like every personal relationship; business relationships go up and down, so ample planning is crucial.
For starters, selecting a business partner requires some due diligence. Maybe your potential partner is a family member, friend, investor or business associate. Regardless, it is important to consider the following when selecting a business partner:
Other considerations may apply or be given more/less weight depending on the context and circumstances.
In addition, partners must make certain considerations when forming the appropriate business entity, whether it be a general partnership, limited liability partnership (LLP), limited liability company (LLC), corporation (S or C-Corp), or some other entity recognized by your State. I will reserve these considerations for another article.
After you select a partner and business entity, but before your wedding date, so to speak, you need to enter into your “prenup,” or what is commonly referred to as a partnership agreement, to protect yourself and your business. Each partnership agreement must be in writing and signed by each partner, and generally include provisions relating to (not an exhaustive list):
- Define responsibilities of each partner – Whether it is day-to-day operations, investment or decision-making responsibilities, there should be no question with regard to “who does what.”
- Investment & contributions – You must determine the contribution of each partner. Sometimes it is money, time and energy, relationships, or other tangible and intangible assets. Regardless, it must be clear.
- Percentage ownership – You should maintain a record outlining each partner’s contribution. Typically, a partner’s initial contribution will determine their percentage interest in the company.
- Restrictive covenants – Non-disclosure and non-compete provisions are common. Nobody wants their partner to “set up shop” down the road!
- Dissolution when one partner does not agree – If the company is going to be dissolved but one partner wishes to keep the “boat afloat,” what then?
- Allocation of profits and losses – You must decide how profits and losses are going to be allocated. In proportion to each partner’s ownership interest, or by some other methodology?
- Guidelines for decision making – Making important decisions with a group of individuals can result in an impasse and business failure, so a good decision-making process can help operations run smoothly.
- Contingencies for death and withdrawal – You must consider the effects a death or withdrawal may have on the partnership. A buy/sell agreement and valuation protocol will manage this situation.
- Resolving disputes – There should be a procedure to determine how disputes are going to be handled, whether it is via an arbitration or mediation clause, or a coin flip. Ok, not a coin flip.
A partnership agreement allows you to determine the answers to appropriate questions that may arise, but without it, you may be at the mercy of the court. Contrary to what you may believe, the cost to execute a partnership agreement is quite nominal, especially as it compares to the time and costs associated with litigation. So please, keep that in mind and protect those who count on you most, including your partners, your spouse and children. If not for them, do it for Fido.
Contrary to what you may believe, the cost to execute a partnership agreement is quite nominal, especially as it compares to the time and costs associated with litigation. So please, keep that in mind and protect those who count on you most, including your partners, your spouse, and children.
If not for them, do it for Fido.
Disclaimer: This blog post is made available by the attorney and publisher for educational purposes and to provide you general information and a general understanding of the law, but not to provide specific legal advice. By reading this you understand that no attorney-client relationship between you and the attorney has been formed. This posting should not be used as a substitute for competent legal advice from a licensed professional attorney in your State.
Dominique (Dom) has been practicing law since 2008, and assists small to medium-sized businesses with a wide variety of matters, such as entity formations, corporate transactions, and litigation, to name a few. Dom also taught classes related to business law, unionization and politics to undergraduate students at a local college. Dom holds A.S. and B.S. degrees in Business Administration, a J.D., and LL.M. (Master of Laws) degree from George Washington University in Washington, DC. Prior to becoming an attorney, Dom was a successful entrepreneur in the restaurant/bar industry.
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