Are you considering going into business with a partner? Maybe you're coworkers striking out on your own, or best friends finally taking the leap and starting the business you've always talked about. Starting a business is exciting, even more so when you're working with a friend, but don't let the excitement blind you to reality. The truth is, a business partnership is more than a friendship, and comes with risks that you must prepare for.
Plan for Disagreements
Don't assume that because you are in business with a friend or relative that you will always agree on business practices. You are bound to disagree at some point, perhaps over the profitability of continuing a product or service, or the risk of entering a new market. If you are equal partners, and neither is willing to budge, you could find yourself at a stalemate. Without an agreed upon method to settle these disputes, relationships could turn sour quickly, and your company could suffer.
To prevent this, you must have protocols to settle disagreements laid out in your members agreement (for an LLC), or shareholders agreement (for a corporation). There are many options for setting disputes. One partner could be granted the authority to make the final decision. You could bring in a third party to mediate and make the decision if a compromise can't be reached. You could even settle things like professionals with a coin flip or a round of rock paper scissors. No matter which method you choose, it is imperative that it is clearly articulated in your business plan before a disagreement arises.
Plan for a Business Divorce
Unfortunately, not all partnerships last forever. At some point, one partner may want out of the business. Whether the split is amicable or acrimonious, you need to determine how to ‘break up' when the time comes. This is done with buy sell provisions in the members agreement or shareholders agreement.
Buy sell provisions not only determine how the leaving partner will dispose of his stake in the company, but also protects the remaining partner. For instance, the buy sell provisions could prohibit the leaving partner from selling his share to a third party without the remaining partner's consent, or at least require him to offer the remaining partner right of first refusal. Or the provisions could state that a leaving partner will propose a number at which the remaining partner must buy him out. There are many options for handling a business divorce, each with its own advantages and drawbacks. The most important thing to remember is that you must make these buy sell provisions as you set up your business. Waiting until tensions are high and one partner wants out to decide how to split up could be disastrous.
Plan for an Owner's Death
Life is unpredictable, and if an accident or illness strikes, you need to determine what will happen if a partner dies. There are many options, and many factors to consider. The decision will not only affect the surviving partner and the business, but also the deceased partner's family.
One possibility is that the deceased partner's stake in the company will pass to his spouse or children. This is an excellent option if the owner has been planning to pass the business on and training a spouse or child to take his place, but if not, it could cause problems for all involved. If no preparations have been made, the surviving partner may find himself in business with a new partner he didn't choose, and the deceased partner's beneficiaries may not be skilled enough or even want to be involved in the company.
Another option is for the deceased partner's interest in the business to be bought by the surviving partner or company at an agreed upon price using an agreed upon formula. This option protects the surviving partner from finding himself in an unwanted partnership and provides financially for the deceased partner's family. When deciding how to allocate your stake in the business upon your death, consider what options will be most beneficial for the company, your partner, and your loved ones.
If you're preparing to go into business with a partner, call The Beck Law Firm at (678) 344-5342 to discuss these considerations and put the proper plans in place. If you're already in business and haven't completed your planning, we can help you and your partner protect yourselves and your company.
For more information, click here to request our free Guide to Starting a Business in Georgia.