If you’re thinking of going into a business partnership with a friend, the biggest problems you’ll end up facing might be caused by what you didn’t say, not by what you said. Too many new businesses between friends suffer because it’s difficult to separate professional from personal feelings.
Even when you go into business with friends or family, miscommunications frequently lead to serious problems that can tank your business, ruin your personal finances and destroy your relationships.
Creating a written business partnership agreement that covers all the bases not only helps you avoid many problems between key players in a business, it can also help you avoid even going into a business relationship that’s not in your best interests.
In a nutshell, a business partnership is a legal agreement between two or more parties that divides the responsibilities, risks and profits of a business venture.
General Partnership. In a general partnership, you share the workload, decision-making, liabilities and profits or losses of the business. You have more input into how the business is run, but this opens you to more liability.
Limited Partnership. A limited business partnership names one person as the key partner. This person, often called the general partner, usually gets to approve any final decisions and has more flexibility and authority to operate the business without requesting approval for each decision. The other partners have a limited say in how the business is run, and reduce some, but not all, of their liability.
Limited Liability Partnership. A limited liability business partnership protects the personal assets of each partner, whether you have a main partner or everyone divides the partnership responsibilities equally. In addition, one partner can’t be sued for the actions of another partner.
This is the type of partnership many “silent partners” prefer. A silent partner often wants a share of the profits of the business in exchange for providing an investment, but doesn’t want to have to perform any of the work running the company or expose herself to liability. Investors are usually silent partners.
Some partners want a share of the annual profits of the company, some want to own part of the company (in the event it’s sold for a profit), and some want both. A partner who owns part of the overall business is an equity partner.
For example, a friend might agree to invest money in your business for a percentage of your annual profits and a percentage of your sale price if you sell the business.
Here are some of the more common miscommunications regarding partnerships when putting together the overall business plan.
Who Runs the Business?
Make sure to put in writing who has the final say in how the business is run. If you have three or more partners, you can settle decisions with a vote. If you have an even number of partners, one partner might get two votes to break a tie. And, remember, if you decide to bring on investors, you need to make sure they’re satisfied, too.
If you decide to share responsibilities, such as marketing, product development, hiring and firing, or financial practices, give each partner a detailed job description.
In addition to outlining who does what, make sure you put limitations on partner activities. For example, who can sign checks over $X? Can any partner sign a contract? Can anyone hire a new employee? Can one partner add a new product or sell an asset?
Can Your Partner Sell Or Give His/Her Stake To Someone Else?
When you enter into a business partnership, it’s usually with people you trust personally and respect professionally. What happens if one of your partners decides to sell her stake to someone you don’t know?
Most people set up partnerships that end when the partners change. For example, if one partner dies, he can’t leave his partnership to his wife. The partnership automatically ends. This might force the sale or breakup of the business, however, because the partner can leave his part of the business to his wife, children or someone else. They just aren’t partners.
Most partnerships allow any partner to end the partnership at any time. This can devastate the remaining partners who might not be able to buy that partner out and continue to operate the business.
Make sure you include a dissolution agreement that spells out the provision that you have the right to buy out your partner if he decides to end the partnership, or that each partner must provide a specific length of time to give notice of dissolving the partnership.
In some cases, you can quickly and easily dissolve your partnerships, add a new partner, or let the remaining partners create a new partnership and continue to run the business. This allows one or more partners to leave with no interruption to the business.
Who Gets What?
Make sure you spell out exactly what each partners gets in terms of financial benefit. This includes salaries, bonuses, a percentage of annual profits and the percentage of the profits generated by a sale of the business.
Make it clear who owns what, in terms of the company’s assets. You might wish to continue to operate the company after the business partnership ends. If so, you might want to own:
Even if you’ve protected the company’s assets so that you can continue to run the business after you dissolve a partnership, you don’t want your former partners directly competing with you.
This will require you to create a non-compete agreement. Many judges don’t like non-compete agreements because they are: a) overly broad; and b: do not include valuable consideration. Make sure you have an attorney review any non-compete agreement you create so that it’s not too broad and that it’s in exchange for something of value.
Overly Broad Non-Compete. If you and your partner ran a restaurant and ended a partnership, you most likely won’t be able to enforce a non-compete agreement that prohibits your partner from opening another restaurant in your state. If you ran a BBQ restaurant, you might be able to enforce a non-compete agreement that your partner can’t open a BBQ restaurant within 10 miles of your location for three years.
No Valuable Consideration. In order for many non-compete agreements to be enforceable, you must give your partner (or employee) something in return. For example, if you agree to teach your partner how to make BBQ, including what type of smoker to use, what wood to select, cooking times for different meats and recipes for rubs and sauces, your partner can use that valuable information to open a BBQ restaurant in a location that’s not in your area.
Another way to offer valuable consideration is to offer your partner $X not to compete with you in your service area for several years.
No matter how close you are to your partner, each of you should get your own attorney to review a partnership agreement. If you decide to draw up the partnership without an attorney, at least put everything in writing.
All images via Getty
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