You’re No Fool – Choose the Right Business Partner (or at Least Cover Yourself)

 You’re No Fool – Choose the Right Business Partner (or at Least Cover Yourself)

We decided to publish this one after April 1 only because we didn’t want you to write this off (tax joke) as just another April Fools’ Day prank. Let’s get right into it – when it comes to business breakups, partnership prenups, or corporate cutoffs, planning for and handling a business separation is no laughing matter. You have to prepare for it before you so much as sign the dotted line on your certificate of incorporation. Follow along as we help you navigate the murky waters of getting into business with someone else.

Partnership Prenups

So, you and your bestie finally decided to open up that sourdough microbakery together. Nice! Congrats! Hope your starter survives and thrives, but how do you ensure that your start-UP survives and thrives too? Will that friendship stand the test of corporate governance and looming overhead? Who is the “front-end” person and who will be the “back-end” person? Will you both share all of the day-to-day responsibilities? Will you be able to have veto power over decisions because you contributed more to the business up front? How about distributions? Does one of you expect to get paid a salary or distribution on Day 1 (HA…ok well maybe that one IS a laughing matter)?

Let’s say you have all of this stuff down, you agree in principle, you shake hands, and you move forward. Fast forward six months later, everything changes. You’ve got flour everywhere, you’re baking 300 country loaves a day, and you just can’t keep up with demand! Everyone loves your bread and you’re MAKING bread. Suddenly, your bestie feels that they’re being taken advantage of. They want a bigger piece of the pie…loaf. Now, there’s a fight. And, with zero written evidence of your original agreement, a messy one at that. Things have, and will, get messier. That’s because without something legal, in black and white, human nature tends to take over – and we humans don’t always think rationally.

So, before you buy more bannetons than you’ll ever need and co-sign an equipment loan for an industrial oven – GET. IT. IN. WRITING. Your bylaws and/or shareholder agreement (if you’re a corporation), partnership agreement and/or operating agreement (if you’re an LLC), is your North Star, your “partnership prenup” if you will. It will set forth everyone’s rights, responsibilities, and entitlements, including voting rights, distribution rights, how changes need to be made (and approved), how a breakup will be handled, and even what happens if one of you were to die, become totally disabled, or retire. It’s important, because while we all hope that our homes never burn down, we still buy fire insurance. It’s as simple as that. And if you want to learn more, check out an older business blog here for more insights on partnership agreements, operating agreements, and bylaws!

The Breakup

Let’s say that things just don’t work out. You and your bestie decide to go your separate ways. What happens next? Well, there are several avenues you can take. For one, if one of you decides that they want to keep the business going, the surviving partner can buy the other partner out of the business. If you didn’t have a solid agreement in place, then you’ll have to turn to statutory default rules (which aren’t necessarily as clearcut as one would hope), sue each other for an involuntary dissolution of the entity or involuntary withdrawal (particularly where one partner has engaged in egregious misconduct), or come to an agreement on valuation and how a buyout will work. If you both agree that neither of you want anything to do with the business, then you’ll be able to dissolve the entity voluntarily, without necessarily going to court. Voluntary dissolution can be a lengthy and costly process, especially where there are a ton of creditors. This is because creditors need to be notified and paid first. Further, the dissolution documentation varies in complexity from state to state and depends on your entity type. Corporations, for instance, will need final tax clearance before their dissolution paperwork can go through. So, as you can see, being careful about who you get into business with, and making sure that you are both adequately protected from Day 1, will save you significant legal headaches down the line.  

We hope this was at least a tasteful amount of fear mongering, but as always, if you’ve got questions, you know we’ve got answers!

~ The W + K Team