What to Consider Before Entering a Business Partnership
There are clear advantages to entering a business partnership with another person. But there are also pitfalls. You can have the best of both worlds with a little planning.
When we talk about “partnership” in this context, we are speaking not just of actual legal partnerships, but any joint undertaking with one or more additional people, perhaps an LLC or closely held corporation, that will create potential problems.
Some of the most important decisions to make before entering such a business partnership include:
- Decide how you’re going to take the business apart before you put it together. The most important thing to think about before establishing a partnership is how you’re going to take it apart if things go wrong, or even if one partner decides to retire. Business divorces are can be as nasty as personal ones and can be even more expensive. At Seikaly and Stewart, the first thing our Michigan business formation lawyers advise our clients to do is develop a written agreement that specifies how the business will be taken apart if there is a parting of ways. This usually means a buy-sell agreement that determines the business’s price or its various assets and what the mechanism is for deciding who will buy the other party out, and on what terms.
- Know how you will handle the death of a partner. An equally important consideration is what happens if a business partner faces an untimely death. How will that person’s interest be handled? Will his or her heirs become partners in the business? In most cases we do not recommend this solution. The business dispute lawyers at Seikaly and Stewart advise there be a buy-sell agreement determining what the interest of the deceased partner will be worth and how it will be paid. For partners young and healthy enough to be good insurance risks, funding a potential buy-sell with life insurance is a great idea. The amount of insurance is set based on what the partner’s interest is expected to be worth. In the event of a death, the deceased partner’s family receives the insurance proceeds and the remaining partner maintains the business. It may make sense to agree that there will be more insurance available than is needed to pay the deceased partner’s estate. The extra money helps the business to sustain itself until the value added by the deceased partner can be replaced.
- Don’t let an unequal partnership become an unfair one. If partnerships are unequal, with one partner holding greater ownership interest, how can the minority partner avoid being run over in all business decisions? A good contract between the parties should specify certain decisions and actions the majority cannot take without minority consent.
- Decide in advance how additional capital will be raised. One of the toughest decisions small businesses face is how to raise additional capital when the need arises. The partnership agreement should clearly state the obligation of each partner to put in additional money, or signing a personal guarantee for a loan. If one partner has considerably more resources than the other, the agreement can provide that both parties are obligated to contribute, but not necessarily in equal amounts. If one party has contributed more than another, that can be carried on the books of the business as an interest-bearing loan, to make it fair to everyone.
- Prevent theft by separating functions. Partners want to trust one another and their employees, but a little caution goes a long way. Avoid having the same person both writing checks and reconciling the bank account. It is much easier to get away with taking money if you are in control of both ends of the bank account.
Call Seikaly, Stewart & Bennett for a No-Obligation Consultation
Setting up and maintaining a small business, like everything else, takes time, effort and planning, but dealing with these five issues can save a world of heartache and expense later. If you are establishing a business partnership, the Michigan business formation lawyers at Seikaly, Stewart & Bennett can help you take all the necessary precautions. Schedule a free, no-obligation consultation by calling 248-785-0102 or filling out our contact form today.