Friday, March 5th, 2021

Business Relationships 101

By Chris Green on Feb 01 2010 • Filed under Chris Green's Legal Basics

In keeping with the relationship theme of this edition it is useful to consider the complex bundle of human relationships that comprise a business partnership

A business partnership is like a marriage but without the sex to knock off the rough edges.

Indeed what most people entering into a partnership fail to realize is that in all likelihood they are acquiring not one business partner, but two. The second, silent and sometimes sinister one is your business partner's life partner to whom they go home and grumble to at the end of the business day.

The true source of many partnership disputes is a complaining spouse who is not involved in the day-to-day work operation of the business. It is often that spouse, rather than your actual  business partner, who is "keeping score": Who is working harder? Who is logging more time at the business? Who has contributed more financially? Who is smarter, or brings in more business?

It is exceedingly rare to find two individuals with identical intellect, energy, skill and capital, as well as the ability to play well with others, so inevitably, in a business partnership, there are going to be some inequalities. Perhaps your partner has childcare responsibilities that prevent her from working late or on  weekends, or perhaps you aren't able to throw in the same amount of start-up money or you have commitments that require you to draw more money out of the business than your partner each month. These inequalities are like grains of sand in a hiking boot – a minor point of friction that rubs, at each step, until finally, an open wound has been created. 

Then too, there are the strongly held differences of opinion that can develop as to how the business is to be run. What course should the business take? Should we splurge on that new piece of equipment, or bet the farm on a newer and bigger location? It can be difficult to makes these sorts of decisions cooperatively, and no one wants to bite their tongue and accede to a dumb decision by a partner when their own economic security is on the line. 

Interpersonal dynamics aside, not every business is suitable to be run by a partnership. Consider that a partnership has to generate not just one good income, but two. Many viable small businesses are capable of generating but a single superlative income, and one of the partners has to exit or they both starve. 

How can you avoid these pitfalls? Well, human nature being what it is you probably can't avoid them completely, but just as a good marriage starts with a good pre-nuptual agreement, so too should a business partnership begin with a properly drawn partnership agreement, or, if the business is conducted through a limited company, a shareholders agreement.  

Such agreements address the important business question "what happens if we don't want to play together anymore?" They provide a framework for dealing with the eventualities of death, disability, disenchantment and disagreement, and also provide a road map for how the business is to be run on a day to day basis.  

A partnership or shareholders agreement acts as a rule book to be followed if the partners have lost the ability to speak or reason with each other. It also commonly has provisions which deal with the insolvency of one of the parties. When one partner is unable to pay her debts, the agreements protects the other partner from the need to liquidate the business to satisfy the claims of the insolvent partner's creditors. 

The proper time to make such an agreement is, of course, during the "honeymoon" when optimism is high and the overdraft is still low and you and your partner are still the best of friends.  

Sadly however, many businesses put it off. Granted, it is not an insignificant expense to have an agreement properly done by a lawyer, but often, it is simple reticence around talking about potentially awkward subjects. Such reluctance is the cause of many a business failure.

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