As the saying goes, “two heads are better than one.” Often it makes sense for two people with a common goal to join forces in a joint business venture. They should put the same care in drafting an agreement between themselves as they do in agreements related to the business. Generally, the two business partners are not going to sign a real estate lease, franchise agreement, or any other host of agreements related to the business without carefully looking at them and having an attorney review the documents. The same care and energy should be exercised relating to the agreement between themselves. In this article, I use the term “partner” in its non-legal meaning so it equally references co-shareholders of a corporation and fellow members of a limited liability company.
A written agreement will not only help courts and attorneys figure out the parties’ rights and obligations if there is a dispute, but it also helps prevent disputes. This is because when both parties have a clear understanding of their rights and obligations to each other, they both know what they can and cannot do and are less likely to do something that the other party thinks is inconsistent with their agreement. Such an agreement between business partners should cover whether the partners should be of equal control of the venture. If they both have 50% control of the company, there should be provisions addressing what happens when they are at a deadlock. Further, there should be provisions dealing with an exit strategy for one or more of the partners. For example, if one of the partners is no longer employed by the company, can she still stay on as a partner? If one partner is a majority controller and wants to sell her interest in the partnership, can the minority partner have the right to force the majority partner to have her come along (commonly known as a tag-along provision)? Can the majority partner force the minority partner to join in the sale of the ownership interest of the company (known as the drag-along provision)? How does one partner’s interest in the company get valued for a buy out and will it at a different calculation upon death, disability, quitting, or being forced out? Can a partner sell her interest to a third party or force her partner to buy her interest? These questions should be considered among business partners of a newly-created company regardless of its structure. Whether it is set up as a general partnership, a corporation, a limited liability company, or other legal entity, these issues are equally as important.
Among attorneys, a business breakup is commonly referred to as a “corporate divorce.” The reason is that while the business partners in the beginning truly respected each other and got along well, the breakup can cause the same feelings of betrayal, abandonment, and other emotions as in a marital divorce. There are substantial advantages if those business partners have the benefit of a clearly-written agreement setting forth their rights and obligations. Not only is it possible one partner is less likely to feel that the other is being “unfair” when, in fact, that partner is working within the parameters of the agreement, but, even if those feelings do exist, both partners should be able to limit the money spent on attorney’s fees since their rights and obligations under the contract will be clearly defined. In many circumstances, when entering into a marital relationship it may not be appropriate to predict failure and enter into a prenuptial agreement. In a business relationship, it is a mistake not to enter into such a written agreement. It is just good business sense to plan for contingencies
J. Daniel Marr is a Director and Shareholder at Hamblett & Kerrigan, P.A. His legal practice includes counseling businesses and individuals on a variety of legal issues and advocating on their behalf. Attorney Marr is licensed and practices in both New Hampshire and Massachusetts. Attorney Marr can be reached at [email protected].