Maybe you have a great idea for a new business, but don’t have all the skills to pull it off yourself. Maybe you’ve been in business long enough to achieve success, but have grown as big as you can on your own. Maybe the service you provide would complement the service another firm provides. Or maybe you and your best friend have always wanted to go into business together and are ready to take the plunge. No matter the situation, you have a new business partner whom you know, like and trust. What could possibly go wrong?
All those horror stories about partnerships dissolving, friendships splintering and tears flowing are for the people who lie, cheat and steal, right? Wrong.
Even successful ventures launched by honest and fair-minded people can encounter destructive and expensive disputes among the founders. Why? Invariably, such heartbreaking outcomes result when well-intentioned partners fail to anticipate, consider and resolve some fundamental issues before their business opens its doors. Some of these issues might be uncomfortable for new partners to discuss while they are still in the moonglow of their commercial honeymoon. But, as any lawyer can tell you, working through those issues is not nearly as uncomfortable as sitting on the witness stand and answering questions posed by your now-former partner’s attorney.
So how can you avoid becoming another frustrated business owner complaining about the American legal system? The same way you have done everything else that has made you successful: be prepared, think ahead and do the hard work. Have candid discussions you’re your business partner about your goals, your expectations, your dreams and your fears. Get input from your spouse, your friends, your mentor and anyone else you respect. Your new venture can be the source of enormous satisfaction, but it can also devolve into bitter disappointment. Take it seriously on the front end and you will have a much greater chance of celebrating your company’s 25th anniversary alongside your new partner.
Here is a to-do list and some questions for potential business partners to consider:
- Remember, each state’s laws differ in meaningful ways. Some online legal resources provide good ideas; others are downright dangerous. It is imperative that you consult an experienced lawyer in your state. By doing your homework in advance and bringing your carefully considered plans to a lawyer, you will streamline the process of establishing a business partnership. When ready to document your new arrangement, have the lawyer draft the necessary agreements or, at the very least, review what you have prepared. You will save thousands of dollars and hours of sleep, because you would much rather hire a lawyer to set up the company than to pick up the pieces.
- What type of entity will your new venture be? The options are numerous and confusing, and there are advantages to each one, but don’t despair. As you address the issues in this article, the type of legal entity that is right for you will become obvious to your lawyer.
- Who will have an ownership interest in the business and who will have the authority to make decisions for the business?
- If two owners each own half the business, how will deadlocks or disagreements be resolved? Tragically, many entrepreneurs ignore this possibility and learn too late that the only way to resolve their unanticipated deadlock in their state is to dissolve the company. Don’t let someone else make this choice for you.
- Will non-controlling owners have the right to remove the individual in control? If so, how will that be done? What will be the process?
- How will you divide the company’s profits? What if you make all the sales, but your partner makes the product? What will happen if you find that you are doing most of the work and your partner’s productivity declines? Use your imagination and your sense of fairness to answer these questions. Ask your accountant for ideas that might resolve this problem. Most importantly, make sure everyone agrees how to divide the money before the first dollar rolls in.
- What happens when one of the owners dies or becomes disabled? You need to know the answer before your partner’s widow asks for the cash value of half the business.
- What if one owner wants to sell interest in the company? Can it be sold to anybody, or do you want a say about who your new partner will be?
- What happens when ABC Corp. approaches a partner with an offer to buy the business? Who decides whether to sell, and for how much?
- If partners will own unequal shares of the business, how much influence does the minority owner have, and how much information must the majority owner share with the minority owner?
Some of these issues are easy to address, and some require a little more thought. The good news is there is more than one right solution to all these problems. The only wrong choice is the one you put off until tomorrow, because tomorrow is far too late.
Don’t wait until there is money on the table to make these decisions. If business partners address these issues up front, they will get along better knowing where they stand, how things will be handled in the future and how to resolve disputes that are inevitable in every relationship.
If you prepare for trouble, chances are that you will avoid it, and you will be free to grow that great business, together.