6 Ways to Protect Yourself When Forming a Business Partnership
For most startups, business partnerships begin without the end in mind. Like most relationships, the excitement about creating a new venture and optimism for the future often overshadows the quiet question, what happens if it all goes wrong?
You may not want to consider the idea that you and your partner could have a huge falling out that ends up in court. Likewise, you probably don’t want to dwell on months of legal troubles or poor business decisions that leave you holding the bag. However, these things happen all too often when a partnership goes sour.
You must protect yourself in a business partnership, and the below tips will help you do it.
Get the Best Insurance Money Can Buy
The type of insurance you can carry as a business owner has changed a lot with the needs and observed pitfalls of startups. Basic packages have now evolved to carry more features suited to the unique challenges of entrepreneurship. Some types of insurance are required by law, but even if they aren’t required here are the coverages you should consider:
- Directors and Officers liability- This type of insurance protects the management team and Board of Directors from shareholder and employment related suits.
- Errors & Omissions Liability- This type of insurance can be a life saver for errors and omissions in intellectual property, privacy and negligence that causes financial or other loss to third parties.
- Crime coverage- This protects against typical business-related crimes like forgery, fraud, computer fraud or theft.
- Life insurance for key players (founders, partners and officers)
In an ideal world, you’d never have to use any of this insurance. However, you’ll be so happy to have it if ever an event arises where you do.
Retain Experienced Legal Counsel
As you’re structuring your business and putting partnership agreements and foundational documents together, good counsel will make all the difference. A truly wonderful attorney and legal advisor will identify holes in your coverage, agreements and areas of business that you never would have even thought of. They can also check all agreements and make suggestions to keep your partnership peaceful even if the worst should happen.
Plan Your Exit
You and your partners never know what life will bring you. Perhaps it’s a forced dissolution of the company down the road, an unexpected death, a contentious divorce or just a desire to sell or cash out. One thing is for sure, talking about the sale of a company or loss of a partner is best conducted before it ever even happens rather than after a partnership has become strained!
With your team of legal and financial advisors, draft up the necessary documents detailing what will happen in the instances that one partner wishes to leave the company, dies . Planning the termination of the business relationship beforehand is imperative to keeping things out of court and the exit of the partnership agreeable.
Practice Total Transparency
While you may not relish the idea of clearly tracking your own movements and activities as well as those of your partners, it is the best way to make sure that no poor business decisions or actions are performed. Activities performed without one or more partners knowledge can open the door to discord at best and at worst, liability and financial damage to the company. With this in mind, it’s important to keep all finances, resources and arrangements in the open.
Technology and workflow software make this easier than ever. Periodically track company assets such as vehicles and machine to ensure they aren’t being used inappropriately at cost to the company. Enter details about sales, meetings and business activities regularly and propose a regularly scheduled of all parties so no one partner feels mistrusted or purposely targeted.
Outline Roles and Compensation Immediately
If no plan is created for workloads, roles in the company and compensation, profits are usually split down the middle. This is fine for equally active partners, but can quickly frustrate a business relationship if one partner is doing all the work!
As early as possible, list out the roles in the company, profits, percentages of stock and any details that have to do with who gets money when. Also include provisions about buying out partners and the sale of the company to make sure all money matters are spelled out before the partnership truly gets underway. In the beginning of an exciting new venture, optimistic partners assume this won’t be an issue. It can create costly litigation that drags on for months, ill-will and long-term damage to the company when partners at odds find this is not the case!
Limit Debt in Writing
Partners can put a provision in writing that limits the amount of debt any one partner is allowed to tie the company to. Any amount over this liability must be approved by the rest of the partners, or just the one partner will be held liable for it.
This is extremely important when documenting legalities in a partnership at the beginning. If you fail to do this, a partner can tack on an unlimited amount of debt to a company. If the company can’t pay it, the partners will be held personally liable for the amount. Even if the conversation feels uncomfortable, this agreement can save the finances of the company and of each partner from ruin.
Brandon Stapper is the Chief Executive Officer of Nonstop Signs & Graphics. At 20 years old, with no formal education and only a few hundred dollars, Stapper turned a $400 custom decal machine in a garage into a printing powerhouse. Nonstop Signs & Graphics has made the Forbes Fastest Growing Companies Award 4 years in a row and services 10,000 clients yearly. The San-Diego based printing company still makes custom decals, but they’ve expanded their offering to all manner of printing from signs and displays to specialty items like car wraps and vinyl appliques.