More than a Handshake is needed when you take on a Partner

Life can seem so much simpler when you are a one-man or one-woman band, such as if you are a sole proprietor or owner of a business. There are no committees or meetings to deal with and you can do exactly what you want, how you want, when you want. However, there just are many times when can't or don't want to go it alone and two or more can do so much more together than apart. That's when you are talking about a "partner" relationship, whether your situation involves a true partnership (which is not so common anymore), corporation, limited liability company ("LLC") or a joint venture.

All of those different structures generally present the same sets of important planning and management issues, regardless of the legal form. And, in the vast majority of cases, it will make sense to discuss and prepare some form of relationship agreement, whatever the name. For a corporation, it will be a shareholder or stockholder agreement. For an LLC, it will be an operating agreement. For the latter situations, it will be a partnership or joint venture agreement (unless all issues are covered in the documents for any entities formed by the venture). Typically, the level of commitment is such, and the potential upside or stakes are such, that it is important not to leave arrangements unwritten or defer them until revenues or profits reach a certain level.

What might be so important that it can't wait? Here's just a short list of key topics to consider:

  • Capital contributions and commitments. It is important for prospective shareholders, members or partners to have well-grounded plans for the level of investment expected of each at the outset and anticipated milestones.
  • Distributions. If the common enterprise has some success and does generate profits, then an area of potential disagreement is whether to take money out or keep investing it. This will depend upon the financial and tax needs of each partner.
  • Conflicts of interest. Often partners have outside business activities and interests that may well overlap and even potentially compete with the common venture. The expectations and priorities as to potential competing business opportunities and time demands should be fully explored.
  • Management and control. Every business presents countless actions to take and decisions to make. Often partners have different roles and levels of participation. More often than not, some level of supermajority approval or partner consent is required for shareholder, board, officer, personnel, finance, business plan, acquisition, contract, real estate, litigation and other matters involving some threshold level of money or materiality.
  • Sale or transfer of interests. Often the most essential partner matter is addressing what happens when the business seeks an additional new investor, a partner dies, a partner wants to sell his or her stake or a third party want to purchase the entire business. A host of common (and sometimes complex) techniques has developed for such situations, including "rights of first refusal" or first offer, "drag along," "tag along," "preemptive right" and "buy/sell" provisions.

I can speak from handling past partner arrangements, that it is very helpful to have worked through these issues early. For example, when a manufacturing joint venture was ended after years of collaboration, the partner agreements helped provide a much smoother separation. In fact, for that very reason, partner understandings should be viewed as serving much the same purpose as prenuptial agreements. After all, it is unlikely that any partnership will last forever.

We will cover some of the above points in more detail in the near future. In the meantime, the business attorneys of Jeremy A. Gibson & Associates, P.C. bring extensive experience and insights to such corporate matters as corporation shareholder or stockholder agreements, LLC operating agreements, partnership agreements and joint venture partnership agreements. They are available to serve and meet with clients throughout the Chicago, Illinois area, including Arlington Heights, Buffalo Grove, Deerfield, Des Plaines, Evanston, Glenview, Highland Park, Hinsdale, Lake Forest, Libertyville, Mount Prospect, Naperville, Northbrook, Oak Brook, Palatine, Rolling Meadows, Schaumburg, Skokie, Oak Brook, Oak Park, Vernon Hills, Waukegan, Wheeling and Wilmette. Contact us anytime for a complimentary consultation.