Wednesday, January 24, 2018

Necessary Agreements When You Start a Business With a Partner

November 16, 2009 by  
Filed under Business Law

Today’s Preventive Law TipIf you are going to have a partner or a couple of partners, get all your ducks in a row and put everything in writing  so you can avoid situations such as this one:

“Two years ago I started a company with a partner.  I brought in 250k in inventory and he brought in about 250k in manufacturing machines.  I was in charge of design and distribution and he was in charge of the manufacturing.

There was no agreement signed by either of us.

Now we want to dissolve the company and go back to what we were doing before.  We have made over 200k in lease payments on the company’s manufacturing machines.  They are not in my name but I don’t want the machines, my partner does. He seems to think that even though the company paid the lease payments for that equipment, I do not get a credit when we separate.  Another issue is that he owned the machines and was making payments before our company was formed.

Am I entitled to any of the payments that our company has paid?”

More often than not, businesses are started with friends and acquaintances without any written agreements.  It’s so easy to become excited about a great idea and the possibility of building something grand together, that nothing else matters.  When you are riding on the high of big dreams and possibly big profits, to actually sit down and think about everything that could go wrong and sign a written agreement, well that would just put a damper on things.

Entrepreneurs are dreamers, and dreams are a necessary element when starting your own business, but the reality is most partnerships fail.  They fail for all kinds of reasons, different managing views, different financial views, personality conflicts, moral/ethical dilemmas, family emergencies, etc.  These risks should be acknowledged before starting a business together.

In the example above, the partners could have prevented this dilemma by discussed things ahead of time and putting everything into a Partnership Agreement.  The agreement could have outlined their contributions to the company and determine how to account for property and liabilities in the event of a dissolution.  Now, if they cannot agree on how to resolve their disagreement, they each will have to get an attorney and settle things in court– a much more expensive solution compared to putting everything in writing in the first place.

So if you are headed down the partnership road, sit down and have a conversation with your potential business partner and talk about:

How much capital should each of us contribute?
What should the ownership percentages be?
Who will be responsible for what duties?
What if one of us wants to leave, what should the buy-out terms be?
What if neither of us has the money to buy the other one out?
What if something happens and one of us dies or becomes incapacitated?
Who will own the company name and/or trademarks if we part ways?
Should there be restrictions on the sale of of our interests?
What about community property interests?  Are our marital partners automatically managing owners?

This list could go on forever depending on the size and complexity of your business and the number of partners you have.  It is by no means exhaustive but should serve as a starting point for a good conversation.  There’s no doubt that these questions will lead into more issues that are specific to your situation.

In the end, the answers to those questions (and more) should be memorialized into a written agreement or several, depending on the type of entity you choose to form.  You may need an operating agreement, bylaws, shareholder’s agreements, partnership agreement and/or other type of agreement.

An experienced business attorney will be able to walk you through the risks involved and draft documents that can prevent a financial disaster in the event the business goes belly-up.


Proviso Law Group attorneys and lawyers advise small businesses and entrepreneurs regarding legal matters.  Our experienced attorneys can form your business entity (LLC, C Corporation, S Corporation, LLP, Partnership, etc), dissolve your entity legally, represent you in a purchase/sale of a business, draft contracts/agreements and represent you in business disputes.


One Response to “Necessary Agreements When You Start a Business With a Partner”
  1. Dave Mites says:

    This is a very enjoyable blog and I like the content and writing thank you very much.

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