When partners embark on a new business venture there’s so much excitement about the future that most ignore the unfortunate fact that disputes are virtually inevitable.
Planning for these disputes is the best way to avoid them. We offer the following recommendations to help you avoid partner disputes:
Put Your Agreement in Writing. Whatever entity you choose, a detailed, written agreement—the business version of a prenuptial agreement—is a must. A shareholder agreement (for a corporation), operating agreement (for an LLC) or partnership agreement (for a partnership) details how the business will be managed. Although not all disputes are preventable, written agreements help minimize them by answering many questions that otherwise lead to disagreements. Your agreement should address:
- Each owner’s equity.
- Each owner’s role, duties and obligations with respect to the business.
- Whether one or more owners will be primarily responsible for the day-to-day business operations and decision-making.
- Expectations for additional capital contributions or loans to the business.
- Whether any owners are entitled to a salary.
- How and when profits will be distributed.
- How to break deadlocks.
- Whether there are any restrictions on competition with the business.
- How to handle transfers of ownership interests in the company.
- What happens in the event of death, incapacity or withdrawal of an owner.
- What happens upon dissolution of the company.
- How and where disputes will be resolved.
- Shareholder agreements, operating agreements and partnership agreements are not one-size-fits-all, so it’s best to have your agreement carefully tailored by an experienced attorney.
Set Clear Expectations for Financial Contributions. Establish clear expectations about how much each owner is expected to contribute and whether contributions—be they cash contributions, equipment to be used in the business or sweat equity—are to be treated as capital contributions or loans. However the contributions are characterized, put it in writing. Document any loans. Also, create rules for future contributions and discuss penalties for a partner’s failure to contribute. These details should be set forth in your agreement.
Define Owners’ Duties. Whether your partners are active or passive, it’s a good idea to have written descriptions for each partner’s duties, as well as the amount of time they are expected to devote to the business to prevent disputes about who’s doing their fair share.
Disclose all Partners in a Franchised Business. If your business is a franchise, be sure to identify all partners on the franchise documents to avoid a default under your franchise agreement and to protect all partners’ rights.
Decide on Compensation and Profit Treatment. Spell out in advance how much money will be paid as salaries or guaranteed payments, how much will be reinvested into the company for expansion or improvements, and how much will be distributed at the end of the year. In addition, agree upfront as to whether distributions will be made to pay owners’ tax bill for company earnings.
Make Company Financial Information Available. Even if the owners don’t have equal control over the company checkbook, it’s important for all of them to have access to company financial information. Many business relationships go sour because of mistrust, but doubts about fairness can be dispelled by giving each owner full access to the company’s financials. Also, be sure to agree in advance on a trusted CPA or accountant to handle bookkeeping and tax matters.
Address Disagreements Directly. If a dispute arises, sit down with your partners to address it. Focus on finding solutions instead of placing blame, and remember that it’s not about winning the argument; it’s about making the best possible choices for your business.
Discuss Worst-Case Scenarios in Advance. Don’t be shy about discussing how things might go wrong. Discussing issues such as what to do if an owner wants to leave the business or isn’t pulling his weight, or how to handle an owner’s death or disability may be uncomfortable at the outset, but talking in advance of a dispute is preferable to fighting it out in court.
Choose the Right Partners. Lastly, remember that friends and family members don’t always make good business partners. It’s important to choose partners whom you trust, who agree with your general vision for the company, who have complementary skill sets and whose strengths make up for your weaknesses.
For more information about building a successful business relationship and how best to avoid disputes, contact us at (312) 216-2720 or firstname.lastname@example.org.