“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.

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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.

Many small business owners use readily available form contracts to enter into all types of business deals, from sales and purchases, to financing and leasing contracts.  While these forms offer a low-cost convenience, they are not customized and may leave out important contingencies unique to your deal.  Or worse yet, they may have clauses which are irrelevant or specifically wrong for your transaction.

For instance, two business men from California and Texas enter into a purchase and sale contract for goods using a form contract.  The deal goes wrong and one man wants to enforce the contract against the other.  In the contract, the choice of law and jurisdiction is Wyoming.  Do you see how this could get ugly and expensive?

What happens if you try to modify the contract and end up including contradictory clauses in the contract?  For example, what if you enter into an asset purchase agreement and you modify the contract to include a financing contingency, but another clause in the contract specifically states “this purchase agreement is effective upon execution and not subject to inspection or financing contingencies.”

As you can see with these real life examples, many things can go wrong if your contract does not cover situations specific to your deal.  The result can be expensive litigation to interpret and enforce a defective contract.  This can cost thousands of dollars more than the cost of prevention from the beginning.

A well-drafted contract can prevent a lawsuit or at least minimize the costs of litigation.

If you are dealing with a reasonable person, the fact that they have signed a written document which outlines the problem and a way to solve it is enough to end the disagreement.

If you are dealing with an unreasonable person who decides to hire a reasonable lawyer to sue you (even though the contract is clear), the lawyer will take a look at the contract and see that they have no case.

If you are dealing with an unreasonable person who hires an unreasonable lawyer who sues you anyway, the judge and/or jury will enforce the contract as written.

When in doubt, hire an attorney to draft a contract specific to your needs.

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Proviso Law Group provides attorney services in the areas of Business Law, Estate Planning, Wills, Trusts, Probate and Trust Administration.  We are located in Manhattan Beach, California near Hermosa Beach, Redondo Beach, El Segundo, Torrance, Hawthorne, Culver City, Los Angeles, Orange County, Gardena, Lawndale, South Bay.

April was a manager at Nancy’s store, so the continued absences had a serious effect on Nancy’s day-to-day operations.  In order to prove that she was entitled to the benefits, April had to show that she was fired through no fault of her own.  April had previously called in sick many times and some of those times were at the very last minute.  One instance was by text message in the wee hours of the morning before the store was to open.  This especially left Nancy in a bind because it was very difficult to find a temporary manager on such short notice, and Nancy lived out-of-state.  

After a series of absences and many different excuses, the last straw came when April was scheduled to work on the weekend of  Valentines Day.  Again, she sent Nancy a text message and told her she couldn’t come in.  This time it was because she had to attend her grandmother’s funeral at the last minute (even though she knew of the scheduled funeral a week before).  One of Nancy’s other employee’s told her that April was actually planning a weekend getaway with her boyfriend (she overheard her on the phone).  

Nancy fired April after a long talk and explanation of the reasons.  She referenced all of the previous last minute absences and reasons (sick, personal problems, etc.).  Well of course, April files for unemployment benefits immediately and Nancy contests the application. 

Once a claim is filed for unemployment benefits, the State hears both sides of the story.  In Nancy’s situation, the State asked for paper documentation.  Did Nancy provide written notice each time April did something wrong?  Well Nancy always provided a verbal warning, but never documented anything in writing.  So now, it was basically Nancy’s word against April’s.  Of course, April shows the state her grandmother’s printed obituary as proof.  The State says, we can’t prove that she went to the funeral, but we don’t have any other documentation which proves her series of misconduct either.  The outcome is still being determined, and the State is allowing Nancy to submit an affidavit of the other employee’s statements, but Nancy’s problems with her employee and the reasons for firing her would be easier to prove if she had written documentation…

So… the moral of the story?  Keep a file on every employee and document, document, document!  This will also help you if any employment lawsuits are filed as well…

When you use a document preparation service, the documents are prepared using the information you provide.  The service cannot give you advice regarding what form of business is right for you, the tax consequences of choosing an entity or advise you of the repercussions of including certain clauses in your will.  The bottom line is, if you don’t understand every clause in a contract or will and don’t know the consequences of what is contained in your document, you can’t ask your preparer.

For example, I had a will signing yesterday and during the review of the will, I was asked to explain what certain clauses meant, like “Independent Administration of Estates Act” and what the “Period for Survivorship” clause was for.  These are individualized clauses which are included or not included in the will depending on the wishes of the Testator.  Some clients would choose not to include the “Independent Administration” clause based on their situation and other clients would prefer a shorter period for survivorship than others.  As an attorney, I am able to clarify the meaning and explain options under these clauses and anything else that I’ve drafted for my client.

Update 10-20-09

One thing to be aware of when you are preparing your will is that there are limitations on who may be named executor of your will, limitations on who may help you prepare your will and have it still be valid, and additional requirements if you name certain people as beneficiaries (such as a care custodian or attorney).

A PA details what kind of information is collected from visitors to your website and how your company intends to use that information (whether you will share that information with a 3rd-party and whether they can opt-out).

Links to both of these agreements should be conspicuously displayed on your website.

Often, when business picks up, you need to hire right away.  Sometimes, employment hiring processes are neglected or employment agreements are not signed. These items can be a headache later on if/when an employment claim is filed against you. 

Part I of this column concentrates on your hiring process.  Ideally, you should identify and recruit motivated and qualified employees.  Your hiring process should be structured to prevent  discrimination, negligence and all related claims.

APPLICATIONS FOR EMPLOYMENT:

1.  Do not ask questions unrelated to the job duties.  Any irrevelant information sought may be used against you to imply a discriminatory motive in an employment action.

2.  Do not ask questions concerning protected information.

3.  Always include a statement that your company is an equal opportunity employer.

4.  Include a statement that providing false information on the job application is grounds for disciplinary action, including possible termination.

5.  Include a statement that employment will be AT-WILL and will not be governed by a separate employment contract.

To be continued…