As a Houston, TX business litigation attorney, I am often retained to resolve business disputes between partners. While it is true that most partnerships will eventually hit bumps in the road that need to be ironed out, with careful planning, many misunderstandings can be avoided as of the business formation. With this in mind, our attorneys have prepared a guideline for those who are considering forming a partnership. The list assumes that you have already properly vetted your future partner and are sure that he or she is someone with whom you want to do business.
1. Educate Yourself as to the Different Types of Partnerships
You may have heard the terms “limited partnership,” “limited liability partnership” (LLP), or “limited liability company” (LLC), but it’s important to understand the liabilities and tax advantages involved in each one. Remember, when you form a partnership, you assume a share of the responsibility for any error made by your partner. Some of these business structures provide increased shielding for your personal assets as well as protection from the actions of your partners. Before committing to a specific type of partnership, it’s recommended that the parties involved review the options with a Texas business formation attorney to determine which is the best fit.
2. Define the Roles of the Partners Up Front
You and your potential partner or partners may have very different ideas about the roles and responsibilities each will assume once the business is formed. Some partnerships are formed with the understanding that one or more of the partners are silent investors who have nothing to do with the operation of the business. Partner roles need to be clearly understood from the beginning. It can be extremely difficult to manage the day-to-day operations of a business, for instance, if a silent partner drops in for a few hours each day and reverses the decisions of the managing partner. By the same token, if a partner is supposed to manage the business, it’s crucial that he or she knows that that is what’s expected.
3. Determine How Disputes Will Be Settled
If you’ve decided to partner with one or more individuals, it’s likely that you have a similar philosophy about doing business. However, that doesn’t mean that there won’t be disagreements. It’s important to have mechanism in place for settling disputes that don’t require getting lawyers involved. This could be something as simple as a vote of the partners. If there are only two partners, a tiebreaker should be considered. A 50-50 partnership can be extremely difficult to manage when there is a deadlock between the partners.
4. Discuss the Distribution of Profits
Compensation is obviously important in any business, but so is reinvestment in the firm. Furthermore, one partner may be expecting a larger share because he or she put up the seed money. Another could expect more for managing the business. Salaries and profit shares can be an enormous source of discord when they are not discussed in the beginning.
5. New Partner Absorption
Under what conditions will new partners be taken on? How does their involvement affect the existing partners’ shares? This can be a point of contention if shares in the partnership are diluted.
6. Restrictions Placed on Departing Partners
What would happen if your partner left the firm and went into competition with you? Because this happens so frequently, Texas business formation lawyers often recommend a non-compete agreement with a survivability clause. This ensures that the departing partner is not able to take the firm’s entire client base with him or her.
7. Right of Accounting
In a partnership, your financial fortunes are tied to others. If one of your partners becomes financially insolvent, his or her creditors may come after their portion of the firm. That’s why business attorneys insist on the right of accounting. This gives each partner the right to review the books.
8. Consider Pre-Nuptial or Post-Nuptial Agreements
In the event that one of the partners is divorced, his or her share of the business could be considered a marital asset. The divorce of one of the partners could mean that the business has to either come up with money to pay off the ex-spouse or sell a portion to settle the obligation.
If you are considering forming a business partnership in Houston or anywhere else in the State of Texas, it is strongly recommended that you retain the services of a skilled and knowledgeable business formation lawyer. Remember, the best way to avoid litigation in the Texas courts is to start with a strong, binding contract.