Business Partnerships – Start with the end; put it in writing; and hope for best.©

Shannon Law Office, LLC

24 East Main

Evansville Wisconsin 53536

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 Partnerships?

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 goals.

Why people should not form Business Partnerships?

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 up? Know the statistics. All partnerships end. Really.

Loner? Not always the best way for the typical entrepreneur to organize a business.

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 manner?

Similar financial goals for selves and company?

Are there any steps I might take before partnering?

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 taxes?

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 Concern?

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 partner.

Triggering events causing need to buy and sell partnership interest … Buy Sell Agreement.

Triggering events are life events such as:

Death

Permanent Disability

Termination of employment or engaging in competition

Retirement

Bankruptcy

Divorce

Disassociation: Leaving for reason other than above.

Do the triggers cause a need to buy at a given price over a given time frame? Yes.

Price determined using (examples):

Fair market value

Periodic agreement of owners

Formula approach

Appraisal approach

Cut throat pricing

Valuation Discounts

Time frame

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 course.

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 think twice?

Hell yes.

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 painful anyway)?

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 objectively.

Thank you for your time.

Further Questions? Call me.

Walter E. Shannon,

Shannon Law Office, LLC608-882-5944

www.shannon-law.com