Starting a business with someone you trust can be exciting. Whether you're launching a startup, opening a professional practice, or investing in a new venture, having the right partner can make all the difference. But before you split responsibilities, or profits, it's important to protect both your business and your relationship.
Many business disputes don't begin because partners acted in bad faith. They begin because expectations were never clearly defined. What starts as a verbal agreement between friends or family members can quickly become a costly legal battle when circumstances change.
Before you go into business with a partner, here's what you should consider to help protect your investment and reduce the risk of future disputes.
A Handshake Isn't Enough
One of the biggest misconceptions entrepreneurs have is believing they can "figure out the paperwork later." Unfortunately, by the time a disagreement arises, it's often too late.
Without a written partnership agreement or operating agreement, California law provides default rules that will govern your business relationship. Those default rules may not reflect what either partner intended.
A well-drafted agreement allows you to decide how your business will operate instead of leaving those decisions to state law, or worse, a judge.
Choose the Right Business Structure
Selecting the right business entity is one of the most important decisions you'll make before opening your doors.
For many closely held businesses, a Limited Liability Company (LLC) offers advantages such as:
- Personal liability protection
- Flexible management structures
- Pass-through taxation
- Customizable operating agreements
However, an LLC isn't always the right choice. Depending on your profession, tax goals, and long-term plans, a corporation or another business structure may better fit your needs.
An experienced business attorney can help evaluate which entity best supports your goals while considering both current operations and future growth.
Clearly Define Each Partner's Contributions
Not every partner contributes the same way.
One person may invest cash while another contributes industry knowledge, client relationships, or full-time labor. These contributions all have value, but they should be documented.
Your agreement should clearly identify:
- Capital contributions
- Ownership percentages
- Compensation for work performed
- Profit distributions
- Future capital requirements
Many partnership disputes begin because partners never distinguished between ownership, salary, and reimbursement of invested capital.
Avoid the Problems of a 50/50 Partnership
An equal ownership split may seem like the fairest option, but it can create significant challenges if partners disagree.
Without a method to resolve deadlocks, important decisions may stall, including:
- Hiring or terminating employees
- Taking on debt
- Selling the company
- Admitting new owners
- Approving major expenditures
Instead of relying on litigation to resolve disagreements, consider including provisions such as:
- Mediation requirements
- Binding arbitration
- Tie-breaking voting procedures
- Buy-sell mechanisms
Planning for disagreements before they happen is much less expensive than resolving them afterward.
Separate Ownership From Management
Owning part of a company doesn't automatically mean every owner should manage daily operations.
Your governing documents should clearly define:
- Management responsibilities
- Decision-making authority
- Voting requirements
- Financial approval limits
- Access to company records
Clearly assigning responsibilities helps prevent misunderstandings while allowing the business to continue operating efficiently.
Create a Buy-Sell Agreement
One of the most valuable documents a business can have is a buy-sell agreement.
A buy-sell agreement establishes what happens if an owner:
- Dies
- Becomes disabled
- Retires
- Files bankruptcy
- Gets divorced
- Wants to leave the business
- Receives an outside offer
The agreement should also explain how ownership interests will be valued and how any purchase will be financed.
Without these provisions, partners may find themselves in lengthy and expensive litigation over ownership rights.
Protect Your Intellectual Property
For many businesses, the company's most valuable asset isn't equipment or inventory, it's intellectual property.
Software, branding, client lists, marketing materials, proprietary processes, and original content should all be properly assigned to the business.
Without written agreements, ownership of intellectual property can become a major source of conflict if a partner or employee leaves the company.
Understand Personal Liability
Many business owners assume forming an LLC completely protects their personal assets. While an LLC provides important liability protection, owners often unknowingly accept personal liability by signing:
- Commercial leases
- Business loans
- Equipment financing
- Vendor agreements
- Personal guarantees
Before signing any agreement, understand exactly what obligations you're accepting and whether those obligations continue if you leave the business.
Do Your Due Diligence on Your Business Partner
Just as investors research a business before investing, you should research the people you'll be doing business with.
Consider reviewing:
- Prior business experience
- Litigation history
- Professional licenses
- Financial expectations
- Long-term business goals
You should also have honest conversations about difficult topics, including:
- Expected salaries
- Time commitments
- Future expansion
- Exit strategies
- What happens if one partner wants to sell
These conversations may feel uncomfortable, but they're much easier to have before money and emotions become involved.
Protect Your Business Before Problems Arise
Successful business partnerships are built on trust, but they're protected by thoughtful planning.
Whether you're forming a new company, bringing on a business partner, or updating your governing documents, taking the time to establish clear expectations today can help prevent costly disputes tomorrow.
At Messina Hankin Law, we help California business owners with business formation, partnership agreements, shareholder disputes, operating agreements, buy-sell agreements, and other legal matters that protect businesses throughout every stage of growth.
Contact Messina Hankin Law today to schedule a consultation and build a strong legal foundation for your business.