Some of the most difficult questions I am presented with has an attorney deal with issues of business partners. Whether you are a general partnership, a limited liability company, or a limited liability partnership you will be faced with questions about the actual relationship between business partners. While many design firms start on someone’s kitchen table or home office, there are quite a few design firms that start off as partnerships or grow into partnerships. Having a partner can be fabulously beneficial, but like all human relationships there is a potential for a once beautiful friendship to come crashing down.
So let me be clear about how you should view your business partner–they are your spouse in the business world. In many ways, going to into business with somebody is like getting married. And just like getting married the decision to enter into business with another person should be intentional and thought out in advance. Unlike divorcing your spouse, in most states, there is no such thing as a no-fault business divorce. Also unlike marriage, at least outside of certain religions, you can have more than one business partner. If you have more than one partner, your business life gets even more complicated.
Again I’m going to be a tad self-serving for lawyers, but you really should have a written agreement amongst the partners. Whether you have a general partnership, a LLC, or a LLP, writing things down and making sure everybody understands their rights and responsibilities will go a long way to making both the operation of the business and the changes to the business that will inevitably come a much smoother process. In addition to a written agreement, here are four things that should be addressed in your partnership agreement.
- Who is contributing what to the partnership? Each person coming into a partnership will have skills and knowledge to help the partnership succeed. Partners often assume that they will each put forth all of their effort into making the business succeed, but that assumption may be wrong. Partners often assume that there financial or property contributions will be equal. Many times equal contributions are possible, but many times they are not. If the financial or property contributions are going to be unequal, the partnership agreement should clearly reflect those contributions. The partnership agreement should also make clear if those different contributions also result in different ownership shares.
- Do you have an exit strategy and process? When partnerships first form there is often a great deal of positive thinking and good feeling. Some partnerships will succeed spectacularly, others will succeed moderately, and some partnerships will crash and burn. A good partnership agreement will address all of these scenarios. Good planning for a partnership agreement addresses what happens if the business succeeds as well as what happens if the business fails. An exit strategy and process makes sure that no matter how well the business does or does not perform the parties will know how to exit the business.
- What happens if a partner wants or needs to leave the partnership? Assume for a moment that your business partner or their spouse is offered a spectacular opportunity in Hawaii. After securing a promise to be able to crash at their house, what is the process if that partner wants to leave the business? Is the company supposed to buy back the departing partners share? If so, what is the process for the buyback? Even more fundamentally, what is the value of their share of the company? This is similar to the notion of an exit plan and process, but it does contemplate a different set of factors.
- Who gets paid what? I am not necessarily talking about salaries. I am not necessarily talking about profit-sharing. When I ask the question who gets paid what, I am talking about the entire financial picture of the company and the partners. When you are in a business partnership, there are number of financial factors that have to be addressed, such as will we be taxed as a partnership or as a corporation? How will we set salaries if our income fluctuates? How will we determine what is profit and loss? To answer these questions, the partners have to know a little bit about the tax picture for each partner? If one partner is married with children, they may want to be compensated differently than the partner who is unmarried and without children. Because so much of a business formation involves questions of finances, speaking to an attorney and speaking to an accountant can help the business partners make a good decision about how the partners will be paid.
These are just some of the questions that potential business partners should consider before entering into business together. As I said before, business partners are, for all intents and purposes, married. Be intentional about the decision to enter into a partnership, failure to do so may result in a business divorce that is ugly, personal, and very expensive.
If you plan to enter into business with somebody, please consult an attorney to help you prepare a partnership agreement.
MATT JOHNSTON IS A SOLO ATTORNEY WITH A FOCUS ON SMALL BUSINESS REPRESENTATION, COPYRIGHT AND TRADEMARK LAW, AND DISPUTE RESOLUTION. MANY OF MATT’S CLIENTS ARE DESIGNERS AND CREATIVE PROFESSIONALS WHOSE CONCERNS OVERLAPPING MATT’S PRACTICE AREAS. MATT CONCENTRATES ON DRAFTING CLEAR CONTRACTS OF ALL TYPES AND HELPING DESIGNERS WITH THE LEGAL SIDE OF THE DESIGN BUSINESS. AS A BENEFIT TO AIGA MEMBERS, MATT OFFERS A 10% DISCOUNT ON ALL CONSULTATION APPOINTMENTS, FLAT FEE PROJECTS, AND HOURLY FEES.
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