The business partner dispute. They happen. But many of them can be avoided if you set out each partners’ duties and expectations when setting up the business.
Disputes After The Fact
Got a call the other day – two friends had formed a fitness business. They had successfully run it for a few years, getting up to about 10 fitness instructors and a full class schedule. But something soured (the person who called me really didn’t know or wouldn’t tell me what). What she did know is that the other partner had stopped doing her duties to keep the business running. That means my client had to pick up the slack and work extra hours.
So now they’re splitting up the assets in a non-asset, no-distribution dissolution. It didn’t help that the business got destroyed by the hurricane three weeks ago.
Setting Out Expectations Before The Dispute
There is nothing I can do as a lawyer to stop a business partner from contributing his share of work to build and operate the business. I can, however, with the help of the owners, set out reasonable duties for each partner to perform. This is done in the Operating Agreement (LLC) or in a shareholder agreement (corporation) when they form the business.
Work Your Business Like An Owner – And An Employee
Of course it depends on the nature of the business and the expected contribution of each owner, but for a small business the owners have to work “for” the business, not just work “on” the business. That means some kind of employment agreement.
Just like any employment agreement, you’ll set out things like hours per week each owner is expected to work. Also, job duties. Set out expectations for time off for vacation and sick days. So for a shift-type business, an owner should reasonably be expected to devote a certain number of hours weekly to the business, on-site, performing the agreed-upon duties. It may be desk/cashier work. It could be cleaning and maintenance. Maybe one owner is better at sales, while the other works the back office.
Whatever it is, set out the agreement *before* you go into business with someone who later decides that it’s reasonable to work the business five hours a week, while you work 55 hours a week.
Make Sure You Can Get Out
Most of the two-person businesses I help set up are husband and wife and also business partners. If they have a dispute about running the business it also becomes a marital dispute. They have incentive to work things out.
But rather than have a business partner dispute fester for months, it’s better to just have an ejection mechanism in the agreements in case of a non-performing partner. You could agree in advance to a forced buyout, or a general dissolution triggered by one or the other business partner.
The process is painful, and having to lose a successful business and start over is not on everyone’s “to-do” list. But like a divorce, it’s better to have a solution in place beforehand and get it over with, than stew in anger for months or years.
If you’re having a business partner dispute, or for any commercial legal needs, call me at (312) 671-6453 or email me at palermo@palermolaw.com.
Check out my other blog posts like this one on Boards of Directors