“A business partnership is like a marriage…”
Starting a business can be exciting. Some persons are able to start and operate a business on their own. Others, for various reasons, launch a business with friends, family members, colleagues or associates.
Regardless of whether you may partner with your mother, brother, neighbor or essentially a stranger, memorialize your understanding in writing. Have partners been successful in business without an agreement? The answer is “Yes.” Is it advisable to do so? The answer is “No.” A written document significantly minimizes misunderstandings among partners and, if partners ultimately decide to go their separate ways, the transition can be much smoother.
A “Shareholder Agreement” (as it’s generally called when a corporation is formed) or a “Partner Agreement” (in the context of a general or limited partnership). Both terms are used interchangeably in this article.
1. Identify the owners, their respective ownership percentage and financial expectations. Clearly set forth the name of each of the shareholders/partners and the number of shares or interest each owns.
Surprisingly, many businesses operate for years without a stock certificate (or member certificate in the of a limited liability company) ever being issued. What could happen is that one partner may assume he/she has an equal ownership in the business while another partner believes that he/she owns a majority of the business. Also, be clear as to the amount of money each partner is expected to contribute to the business initially and on a going-forward basis, and how profits and losses will be allocated.
2. Management Issues. In certain businesses, particularly newly formed, small businesses the owners participate in its daily management. It therefore makes sense to outline the duties and responsibilities of each partner so that all expectations are known.
3. Decide if ownership interests can be transferred to third parties. This is particularly important for small businesses which are “closely held” (i.e., has no more than five owners). Without this understanding, one partner may transfer his/her interest in the company to a spouse, his best friend or some stranger, for that matter. The other partners may not want to be in business with someone they don’t know, like or one with a different business philosophy. A shareholder agreement may provide that a transfer of stock or ownership interest is not permitted without the consent of the other partners, and may provide that the other partners or the entity may have the first right to buy the shares or interests that a partner wishes to sell or transfer (i.e., a right of first refusal).
4. The effect that the death, disability or retirement of a partner may have on the business. If a partner becomes ill for an extended period of time or retires, chances are he/she ay no longer contribute to the business or its operation. An agreement may be structured to provide that such partner’s shares or ownership interest is to be bought back by the company or offered to the other partners.
5. Treatment of confidential information. Owners of a business often obtain access to confidential, nonpublic information such as inventions, costumer information or marketing strategies. If a partner departs from the business, he may use this confidential information to his advantage unless an agreement is signed precluding that partner from doing so. The shareholder agreement should include a clause which requires each partner to keep all nonpublic business information confidential and not to divulge it to any third party without the company’s, he or she should be required to return all confidential information to the company.
6. Restrictions against non-competition Avoid any misunderstanding or confusion as to whether a partner can enter into a similar business if he or she were to leave the company. A non-compete clause in a shareholder agreement can provide that a partner cannot directly or indirectly compete in the same type of business within a certain mile radius of the company’s location.
These are a few key terms relating to a partner agreement, but by no means a comprehensive list. What’s important to remember is that whatever terms the partners agree to, such terms need to be in writing and signed by all partners. In many aspects, a business partnership is like a marriage good communication is key. The failure to effectively communicate and enter into agreements that all parties can live with can lead to a messy divorce.