In today's Freedom Friday blog and email newsletter, I want to discuss another rarely asked question, and that is how your small business can avoid partner disputes. No one wants to be in business with a “partner” who is not pulling their weight in the business venture. But no one wants to be in a lawsuit that you might call a “business divorce.” So, in today's Freedom Friday blog and email newsletter, I want to answer the question, “How can my small business avoid partner disputes?”
First of all, I want to talk about the word “partner.” This is a legal term. Many people have a business “partner,” but they do not have a legal partnership. Instead, they have a two-member LLC, or something else. Regardless of the business entity which you have chosen to form (or if you have not chosen to form an actual business entity), its important to create a “sandbox” for you and your business partner to play in. That “sandbox” should be in writing, and it should be a written partnership or operating agreement, depending on the business entity you have chosen. If you actually have a formal partnership, then you need a partnership agreement. If you and your business “partner” have formed an LLC, then you need an operating agreement. Here are four (4) key provisions in every partnership or operating agreement for your small business:
The first key provision in a partnership or operating agreement is the issue of investment. Partnership and operating agreements can document how much each partner invests in the business. This can sometimes be a percentage, e.g. each partner invests 50% each, but it can also be divided in other ways. For instance, one partner can invest the building, and the other special equipment. Also, sometimes a certain partner will contribute capital and the other partner will contribute “sweat equity,” and in these cases, the capital contributor is sometimes referred to as the “silent partner.” Such investments should be listed in your partnership or operating agreement.
2. Division of Labor
The second key provision in a partnership or operating agreement is the issue of division of labor. The partners of a small business need to discuss amongst themselves how they will allocate obligations and control. For example, if business partners are coming together to start a new restaurant, sometimes one partner manages the front of the house, and the other partner manages the back of the house. Again, one partner may be “silent” and the other runs the business as a full manager. While there is no “right way” to divide up the labor in a partnership or operating agreement, failing to discuss this issue and agree on the division of labor can lead to litigation later on.
The third key provision in a partnership or operating agreement is the issue of finances. The partners in a small business need to answer a lot of questions here. For instance, how will profits be handled (will they be re-invested or not, etc.)? Also, will the partners draw a salary or take distributions instead? The partners also need to decide together the tax status of the business. Lastly, if there is an opportunity to draw on a line of credit, which of the partners may do so and under what circumstances? All of these questions need to be answered in a well-written partnership or operating agreement.
4. Planning for the Future
The fourth key provision in a partnership or operating agreement is planning for the future. This issue involves several aspects, including a solid buy-sell agreement if something happens to one of the partners in the small business. It is also important to agree on how partners will work out future disagreements in the business. Lastly, a solid partnership or operating agreement should outline how an additional partner would be added to the small business, what happens if one of the partners leaves the small business (either voluntarily or otherwise), and how the small business can be dissolved if it has run its course and the partners decide to end the business venture. All of these issues should be outlined in a written partnership or operating agreement.
If you are interested in starting a small business anywhere in Oklahoma, or you are needing legal help building, protecting, or defending your small business, please contact me at [email protected] to schedule a FREE strategy session.
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