There may come a point in your business life cycle when you may be tempted to consider a partnership relationship. Some may think this is a panacea and will ensure the success of the business. This may be so. On the other hand, it is more often a naive myth than a pragmatic reality.
You should honestly ask yourself why you are considering a partnership and if you think a partnership would work out. Some people go into a partnership relationship because the other partner(s) have money, contacts, expertise or skills which complement your contribution. You might want to consider other business alternatives that might meet your goals. For example, having a joint venture or strategic alliance or consulting or independent contractor relationship on an “as-needed” or project basis. These options can be structured to give you individual autonomy, independence, flexibility and control. In effect each party would still retain their separate business structure, in legal and tax terms.
The reason you want to be cautious, is that the casualty rate of business partnerships is very high. There can be many factors causing a falling-out. It is not uncommon in terms of human dynamics to have potential conflicts occur due to differences of priorities, personalities, or philosophies over a period of time. In addition, there could be differing expectations by each of the individuals in terms of the contribution of time, money, and talent. Other factors that tend to cause friction include the issues of ego, money, and power. These three areas are frequently the undoing of business relationships.
Business conflict usually results when extremes occur. For example, when the business is doing very well or very poorly. Another factor is burnout or life-style changes. Many people get tired after a while of the time, energy, and commitment involved in a business operation and want to do something else – go into another business or otherwise free up money that is invested in their business. There can be marital or health problems that cause a person to lose interest in the business or create conflict within the business.
For these reasons and the serious implications that would result, you should have a partnership/shareholders agreement to protect your interests. The agreement sets out formulas for resolving potential disputes and other issues. For example, division of duties and responsibilities; life insurance on partners; powers of directors; selling the business; share sales and transfers; shareholder investment, loans or guarantees; signing authorities and borrowing powers of the company.
One of the key provisions in a shareholders agreement is a buy/sell clause. You may want to buy out your partners or vice-versa in certain situations, such as disagreements, death, disability, bankruptcy, termination of employment or default of terms of the agreement. The agreement should be prepared prior to the incorporation of the business, or in the case of a partnership, prior to commencing business.
Draft your own version of the key factors that you would like included in an agreement, after discussion with your potential partners. Then take your draft agreement to the lawyer being retained for the business, to be reviewed and finalized. Make sure you have your own independent legal advice. Every partner should do this, as the corporate lawyer cannot also advise the individual partners. This would be a conflict of interest. The legal costs involved will depend on the degree of complexity of the agreement, the number of shareholders or partners involved, the number of meetings that might be held going over and explaining the various terms of the agreement, and other factors. At an estimated charge-out rate of $150 per hour you should expect to have an average time range of from 5-10 hours ($750 – $1,500) for a basic shareholders agreement.
