Sunday, November 30, 2008

Starting a Business with a Partner?

Let me say I am not using partner in its technical sense. I know of small corporations where they speak of one another as partners. I do not know many lawyers who like the idea of a partnership compared with a corporation or a limited liability company. Partnerships lack the liability protections of a corporation or a LLC.

With all that in mind, I still think

Contemplating a Business Partnership? from BusinessWeek makes very good points about starting a business.
In their book Beer School, Steve Hindy and Tom Potter, who founded Brooklyn Brewery in 1987, described the importance of defining a partnership from the outset and formalizing it on paper with a set of parameters that could be referred to when questions or troubles arise. To underscore their point, the pair wrote: "Even a dog can shake hands."

"One important thing that we did at the beginning," Hindy explained to BusinessWeek in a 2005 interview (, 11/18/05), "was to draw up a partnership agreement that defined it financially and also defined a buy-sell agreement, in case one of us wanted out or in case of disputes. Over the years, I saw many partnerships dissolve into chaos. They had shaken hands at the beginning, but there was nothing on paper to define what that meant." The two parted ways amicably when Potter retired in 2004

According to Dushnitsky, the early stage of the business relationship is the time to determine what each person can bring to the partnership

in terms of capital, contacts, level of engagement, as well as to see
how each views their commitment to the venture, their vision, and the time line they see for its development. In other words, Dushnitsky says, "early on, it is easy to have an honest conversation." Moreover, it will become apparent rather quickly if the parties are on the same page to be able to move forward successfully.


It's not that Dushnitsky is opposed to formalizing a partnership
agreement eventually. "I do think a document is extremely important," he says. "But [it's] just like a marriage. You don't [bring] a ring in one hand and the prenuptial in the other."

Get the understanding about the business and everyone's earlier rather than later. then get that understanding into a LLC operating agreement or corporate by-laws.

Newsday's Guidelines to making a partnership work covers some of the same territory but this only reinforces the major point here - get things understood at the start of the relationship.
Picking the right partner, though, takes careful consideration, say experts. The wrong union can spell trouble for you and your small business and end as messy as a bad divorce.

"Getting involved in a partnership is like getting married," says Ira Nottonson, a Boulder, Colo.-based attorney and author of "Forming a Partnership: And Making It Work" (Entrepreneur Press; $32.95). "The problem is some marriages last and some don't."


Not having a partnership agreement: A partnership agreement outlines the terms of the partnership. Think of it almost like a prenup. "It's an ounce of prevention," explains Marilyn K. Genoa of the law firm of Genoa & Associates Pc in Old Brookville, who's also on the board of directors of the Nassau County Bar Association. It should lay out such critical issues as partners' expectations, responsibilities and roles, exit strategies (i.e. if a partner wants out or wishes to sell), and ownership interest of each partner, says Genoa. "Who's putting in what and who's taking out what are the two biggest questions," adds Ralph Warner, co-author of "Form a Partnership: The Complete Legal Guide" (Nolo; $39.99) and president of Nolo, a Berkeley, Calif.-based provider of legal information.
Not considering the business structure: A general partnership can be formed on "a hug and a handshake," says Nottonson. But there are other types of partnerships, including limited partnerships, which can offer different liability and tax consequences. See /smallbusinessplanner/start /chooseastructure/START_ FORMS_OWNERSHIP.html. Consult with your accountant and attorney to see which one best fits your business. "You need to think through what your potential liabilities are and what your tax consequences are going to be," says Zankel.
If you are looking to start an Indiana business and need legal counsel, please give me a call.