By Eric D. Morton
A common, and potentially destructive, problem for businesses occurs when a partner in a business wants out of the business and might quit or stop working in it. This might happen for a variety of reasons. The owners of a business might find that they are not compatible as partners. Other common issues are financial disputes between partners, including the simple fact that sometimes a business can’t financially support all its owners.
The fact is that most business partnerships fail. How harmful that breakup depends on the amount of business and legal planning that the owners put into their partnership in the beginning. Otherwise, the cost of a business break-up can be enormous.
When I speak of partners, I mean generally owners of a business in which more than one person owns the business. This could be a general partnership, corporation or a limited liability company. The problem is the same with some differences depending on the entity type.
What is the solution?
The solution is be proactive. What is needed is a dose of realism between business owners when they get into business with one another. There are three steps in this process.
- Realistically look at each other. Before individuals go into business together, they must take an honest look at each other. What is each person contributing to the business? What are the strengths and weaknesses of each person? Do those compliment the strengths and weaknesses of the other? Are their styles of doing business, personalities, and working habits compatible? In other words, can they really expect to be able to work together?
- What are they expectations of the owners? Do they intend to work full-time? Do they expect to draw salaries and make a living from the business? What do they expect to do for the business and what do they expect the other owner to do? The owners need to get their expectations out in the open and fully discuss them and agree as to how they are going to run the business, what they will do for the business and their business goals.
- Finally, if they realistically can work together and their expectations are aligned, they need to get them in writing. In fact, they need to talk to a lawyer and have those agreements professionally drafted. I can state with all humility that every dollar that business owners spend on shareholders/partnership agreements and employment contracts between them is money well spent.
I have litigated and otherwise handled disputes between business owners after they could not get along and they parted ways. Those disputes are expensive and painful. They are very difficult to resolve due to limitations set by the law – and every one of them could have been avoided if the owners had followed the three steps I listed above.
More importantly, these steps are simply good business practices and will more likely make the partnership succeed. Unstated and failed expectations are the most common grounds for disputes. If partners realistically look at each other, state what they expect and reduce those expectations to writing, then the chances of them being successful increase several times.
Remember, most business partnerships fail. They can be very rewarding but they are difficult to make work. If the owners have the appropriate agreements in place, the break-up between owners might be awkward and stressful, but it will be short and will reach an inexpensive conclusion. And that is much preferable to the alternate.
Eric D. Morton is the principal attorney at Clear Sky Law. He can be reached at 760-722-6582, 510-556-0367, and firstname.lastname@example.org