Each year, thousands of ambitious entrepreneurs start new businesses, that, more often than not involve more than one leader. These types of collaborations, also known as partnerships, are common in many businesses, particularly with professional service firms.
Unfortunately, disputes often arise when initial agreements do not provide partners with clear guidance and disagreements can be bitter when money is on the line.
According to the Small Business Association (ABA) over 657,000 new businesses open each year. However, only 51 percent of these businesses last past five years. Exploring the causes of small business failure before you start your company may help you avoid this outcome. When starting a new business, there are a number of details to consider, especially when beginning with a new partner.
Perhaps the most important way to avoid a partnership dispute is to have a written agreement in place. This can either be an operating agreement or partnership agreement, depending on the type of business. Although it is impossible to plan for all potential scenarios, an agreement should specify the procedures for how all disagreements will be handled and hopefully resolved.
The agreement should, at a minimum, clearly define the following items:
- Each partner’s role in the company;
- Each partner’s duties and obligations;
- Compensation;
- What procedures the business will adopt and follow for making decisions;
- Terms on how and when a partner can withdraw and how ownership percentages will change if an existing partner or new partner invests additional money into the business;
- How to handle the removal of a co-founder or partner; and,
- Under what circumstances the relationship between the partners, or the business, can end or be terminated.
Addressing these issues may seem like discussing a prenuptial agreement with your future business partner. However, it is crucial that you take the time to address these issues for several reasons. Over time, expectations and pressures on business owners and partners usually change and agreements such as this one, can set boundaries. It will provide you both with an enforceable set of guidelines you can use to navigate unfamiliar terrain and difficult problems.
Having a documented agreement means that, if there is a future dispute, you can refer back to the contract as a starting point for a discussion. If you cannot resolve your differences through a mediator, you should immediately contact an attorney who can help you understand your rights and obligations, and to what extent your partner has similar rights or obligations