The keys to avoiding bad partnerships

05/05/2022 07:59 By #Marketing

Before you even contemplate business partnerships of any kind, consider this:

Don’t rush into a partnership. The success of your business depends on it. 

Most important of all, seek and pay for expert professional legal advice and tax advice. 

Not all partnerships or joint ventures are created equal. You need to consider your goals and future aspirations for the business. If you are thinking of entering a partnership or joint venture, consider the following issues:

a)  Make sure you trust anyone you go into business with.

b)  Vet everyone involved in your business dealings. Make sure they are trustworthy and dependable.

c)  It is imperative to conduct background checks and speak to personal references for your business partner(s). This will protect you in the long run.

d)  A potential issue will become an issue if you don’t address it in advance.

e)  Think about the worst thing that could happen.

Talk to a separate attorney if you are concerned about using the same lawyer as your partner(s).

Some Considerations to Make When Setting Up Your Partnership
The most important steps in the partnership process are creating a partnership agreement and setting up an appropriate structure/entity for the partnership.


To design a business partnership agreement that fully captures the nuances of your relationship with partners, you need to understand how they will operate.

A partnership agreement that defines a dozen or so of the critical areas of the business is essential to most solid partnerships.


1)  Always make sure you have a clear understanding of what each officer is authorized to do on behalf of the company.


2)  It is important to outline each partner's responsibilities and duties, because when not clear then there will be misunderstandings. Moreover, it’s important to have a predetermined consequence for partners not completing their duties.

 

3)  Capital from stockholders. How much time, money, and assets are each partner contributing to the partnership? This includes the initial capital as well as any future amount that may be necessary to keep the business running should you need it.


4)  Dividends, salaries, compensation, and losses. Any right of the partners to receive discretionary or mandatory distributions, which includes a return of any or all of their contributions, needs to be clearly and specifically set forth in the partnership agreement.


5)  Unanimous vote requirements: The number of shareholders a firm needs to have unanimous agreement is often decided by the management team, and they can make provisions for a lower threshold if it becomes important.. What decisions must be made by unanimous consent?

 

6)  Dissolving the partnership and winding up its affairs. For example, If you are entering into a long-term real estate deal that has an exit clause, avoid the possibility of litigation by agreeing on timelines for that clause to be used or terms.


7)  A buy-sell provision. A buy-sell provision is a common feature of business partnership agreements. It establishes how the partnership will deal with the issue of one partner’s death or departure from the company. A buy-sell agreement is a special kind of contract that provides for the sale and purchase of shares in a company, such as when a shareholder dies or wants to sell his or her share in the company.


For example,

-  what if one partner voluntarily or involuntarily leaves the partnership? How are they bought out?

-  What happens if you want to sell your ownership interest—should your business partner have a right to buy it before you sell it to a third party?

-  What if your business partner dies? Or gets divorced? Or files for bankruptcy? Or just wants to retire?


8)  Expulsion provision. This is a double-edged sword that should only be used in special circumstances, because it gives your partners the authority to force you out of the business if they deem it necessary.


9)  A non-compete agreement is a contract between two or more parties in which one of the parties agrees not to enter into competition with another party. The most common type of noncompete agreement is an “employer-employee” agreement where an employer seeks to enforce a post-employment restriction on its former employees against competing with their former employer for a period.


You and your partners should sit down and discuss the best- and worst-case scenarios. You should hire a competent lawyer to represent the company or have each partner hire an attorney to review the partnership documents and address the above issues, as well as the individual needs of your situation.