The perils of a friend as a business partner

When you start a new business partnership, there’s a period of time when everything is exciting and nothing can go wrong. This honeymoon period can come to an end when you realize you’re no longer on the same page. Then what?

A partnership agreement is a simple and clean way to protect your business and your relationship. This document can structure everything from your rights and responsibilities to what happens when a partner leaves. Each state has its own default partnership law that controls absent an agreement, but your own agreement will give you some specialized guidelines and flexibility.

Here are some things to consider:

• How much money will each partner contribute? Determine each partner’s share of the profits and losses before there are any. If you can afford to pay for computer parts and your partner cannot, are you going to want more of the profit? If you do all the work and your partner contributes money, should the disbursements be equal? How will you value “sweat equity”? What if the business folds? What if you agree to provide equal startup capital, but your partners don’t pay their share? It can be uncomfortable to talk about these issues, but it’s worse when partners have a falling-out without answering these questions. Get it in writing now and avoid the headache.

• Are you a “numbers” person? If you’re not, or you’re uncomfortable with the idea of having your partner controlling the money, do yourself a favor and hire an accountant. Decide what your fiscal year will be and what accounting method you will use.

• Make sure the partnership keeps proper and complete accounts of its business at its main office. Also, confirm that your agents and attorneys have access to the records.

• Who will participate in the control, management and direction of your business? If you disagree with your partner, how will you make a decision in case of a deadlock? Some businesses have one partner who will make “creative” decisions and another who will make “business” decisions. If you do that, make sure you clearly define what constitutes “creative” or “business.”

• What if your partner wants to be involved in another business, like starting a consignment store? What if that consignment store starts selling computer equipment and offers installation and maintenance? Protect yourself from an awkward disagreement by discussing whether a partner can be involved in another competing business.

• What happens if someone wants to join the partnership? Can a partner sell or gift their partnership interest? What if your partner gives their interest to someone you dislike? Should you have the option of buying them out? What if one of you dies — does the business go to the remaining partner, or to the partner’s estate?

Partnership agreements should fit a partnership’s particular needs. If you are serious about starting a business, have the tough conversations now.

Mary Hudson is a business law attorney with Hudson & Luros, LLP, in Napa, and can be reached at mary@hudsonluros.com or 418-5118. The information provided here is not intended as legal advice, nor does it form an attorney-client relationship with the author. The author makes no representations as to the reliability or accuracy of the above information. In a perfect world we wouldn’t need disclaimers — or attorneys.