What is a business partnership?
The term “Partnership” has a specific legal meaning, but for the purposes of
our discussion let’s use partnership in a generic sense. In a generic sense
groups of people can form a business partnership together using various
legal entities as the platform.
Examples of entity platforms: Some examples are: limited and general
partnerships, corporations (S and C), and limited liability companies (LLCs).
“Business Partners” in these entities can be individuals, trusts, corporations,
LLCs or other partnerships. Often called shareholders, members, or partners.
Why do people form Business
Complementary skill sets. Cover more ground and improve your chances
of success by joining up with the right person. Two people working toward a
common goal can accomplish more than they could as individuals.
Money. The necessary capital to get started. Spread the risk. Shared
equipment or expenses.
Appearance. Two people working together have a much more professional
and competent appearance than does an individual.
Support. Someone around who can motivate you. Bounce ideas. Shared
Why people should not form Business
Partners in a general partnership are jointly and individually liable for the
business activities of the other. You can limit this by using certain entities.
LLC for instance.
You will have to share profits.
You do not have total control over the business. Decisions are shared, and
differences of opinion can lead to disagreements, fights and litigation.
A friendship or familial relationship may not survive a partnership.
What should I consider before I Partner
Know the statistics. All partnerships end. Really.
Loner? Not always the best way for the typical entrepreneur to organize a
Who am I? Really.
Who is my potential partner? Really.
Do we …
have the same motivation, values and similar work habits?
communicate well with one another in a pleasant, respectful and comfortable
Similar financial goals for selves and company?
Are there any steps I might take before
Interview each other. Check each other’s personal finances. Check out
each other’s personal lives.
Test drive the relationship. Employee first. Projects together.
Each own your own operation first before forming.
Probation period as partners. Quick out within the first year or two.
Graduate up - percentage ownership.
What is a good way to proceed?
Write it out. With any business formation, the details and obligations should
be agreed upon by all parties, clearly defined, and written out. You will
need that written guidance when things go wrong.
Decide on Control: One or the other; both? Democracy or dictatorship?
Does respect and fairness mean equal? Every business, including
partnerships, needs a boss. If you decide to go the partnership route, make
it a 60/40 or 70/30 split. Then you and the business have a point person for
accountability and overall operational control.
50/ 50 exists. Tie breaker for those.
Confidentiality: Can you trust the partner to keep secrets? If not … do not
do it. It is a good idea to add language requiring confidentiality. Also good
to require arbitration if the parties cannot agree. Avoids CCAP.
Contributions? Whenever you share your own capital--be it money,
resources, information or property--be careful to work out a written
arrangement where expenses are shared in an "associative" arrangement.
It also makes it easier to walk away if things go wrong.
Distributions? When can they occur? Limitations on them? What about
How are we planning our ending? It is critical in any partnership agreement
to define the terms of an exit strategy that allows you or your partner to
walk away from the partnership. That usually provides options to buy out
the other party. This can be done very clearly and simply--and without
imploding the operations of a successful business.
What are typical Exit Strategy Points of
Sale by partner to a third party… Right to first refusal.
Typically the agreement in place limits transfers to certain individuals. If a
partner’s share is contracted to go to someone else, then the other partners,
or the company, if one is formed, can buy the interest of the selling partner at
the contract price. This is to avoid having your current partner pick your next
Triggering events causing need to buy and sell partnership interest … Buy
Triggering events are life events such as:
Termination of employment or engaging in competition
Disassociation: Leaving for reason other than above.
Do the triggers cause a need to buy at
a given price over a given time frame?
Price determined using (examples):
Fair market value
Periodic agreement of owners
Cut throat pricing
Usually given 30 to 120 days to make exchange of ownership for money.
Sometimes longer if trigger event requires more time. IE: Estate needs to run its
What are some funding methods for
Buy Sell Agreements?
Entity pays for the ownership interest
Other partner pays for partnership interest
Creditor financing of purchase
Seller financing of purchase
Using life insurance to fund the Agreement
Using Disability Insurance to fund agreement
Family and friends as partners: Should I
Family and friendships: While exceptions do exist … Don't go into any
business arrangement with a family member or friend expecting to remain
as well connected after a partnership breakup.
It may sound great to do business with your family and friends. However, in
the business world, it's always business first and friendships second. Often …
when the business relationship ends, so does the relationship.
Some of these relationships do last for years….
What are some ways to make these
arrangements more successful (or less
Formality: Try to keep the business side as formal as you can for family and
friends. Rarely seen in practice … but formality can be a life (and
occasionally a marriage) saver.
Know your screw balls. We all know when we shouldn’t do it. Just say no.
Control: Limit control to the active business participants.
Fair buy-out language: Families and friendships do better through the
process if a formula or plan on buy out is laid out clearly, fairly and
Thank you for your time.
Further Questions? Call me.
Walter E. Shannon,
Shannon Law Office, LLC