Starting a new business with partners? Tips for avoiding trouble in paradise

Starting a new business is a rewarding experience filled with optimism. It is also a time when new partners should focus on housekeeping matters that can help them avoid costly intra-company disputes down the road. Here are some tips to avoid trouble in paradise.

Have a written operating agreement

Whether partners form an LLC, corporation, partnership or other entity, they should sign an agreement that describes how the business will be managed, how profits will be distributed, and includes expeditious mechanisms for resolving disputes if partners become deadlocked.

By far, the most common causes of disputes in businesses involve: (1) who makes decisions; (2) profit distribution; and (3) transfers of interests to third-parties.

Define how invested money will be characterized and repaid

Business partners often provide seed money to get their venture off the ground. Defining how that money will be treated, i.e., whether it is a capital contribution or a loan is crucial. If seed money is to be treated as a loan, having a written promissory note spelling out the interest rate and repayment terms is hugely beneficial. Partners should also develop rules for raising additional capital from the partners and for addressing those occasions when some partners have the ability to contribute additional capital while others do not.

Have transparent accounting systems

Problems can arise when one partner feels as if he or she is being kept in the dark about the company’s finances and operations. Ideally, each partner should be able to review the company’s bank statements, financial statements, and accounting systems without requesting access from the others. This does not mean all partners should have equal control over bank accounts or check-writing authority, but there should a mechanism in place to assure that all partners know what is happening in real time or as close to it as possible.

Consider developing written job duties

Some partners play an active role in the business and others act as “silent” partners. Whether and to what extent a partner is involved in day-to-day operations should be spelled out in the company’s governing agreement or elsewhere. If a partner is to receive a salary and benefits in addition to his or her profits interest, the amount of the salary and benefits should be spelled out in writing and agreed upon at the outset.

Provide for the unexpected

Decide how you will handle the buyout of a partner who becomes disabled or a payout to the estate of a deceased partner.  Investigate approaches to value your enterprise and select a valuation method that can be memorialized in the operating agreement. Costly and unpleasant disputes can and do arise in even the best-managed businesses. Negotiate and memorialize terms between partners at the commencement of the business relationship to help avoid ambiguities, conflict and litigation down the road.

Damian L. Albergo is a member of Cole Schotz’s litigation department. He represents individuals and small businesses as well as large corporations in disputes at state and federal courts in New Jersey and New York.