Don’t go in Business with a Partner up until you read this!
Going in business with friends and family is a lot like a marriage. Whether you start your business as a corporation, a limited liability company, or an unincorporated partnership, your obligations to your co-owners are often very much the same. Generally, once you and another person or persons go into business together, by that very act, just like a real marriage, certain legal obligations to your partner automatically arise as a matter of law. Once you become partners in a business enterprise, you and your business partner(s) will each owe the other overriding duties of loyalty and care which are known in the law as fiduciary duties. As a result of those duties, you are no longer free to act solely in your best interests with respect to your dealings in the commonly owned business. With that, you will have a duty to act in the best interest of your partners in that business and to the business itself. This is often where the problems start.
I am a commercial litigator who regularly represents parties in partnership and shareholder disputes. These disputes are often ugly and very expensive. On many occasions, the dispute pit close family members against each other. In many cases, the litigations involve father vs. son, sibling vs. sibling, cousin vs. cousin or life-long friends in gut-wrenching disputes over philosophical issues, such as management control, business succession issues, and issues relating to the direction of the business, or even nastier cases involving claims of fraud and misappropriation. Disputes such as these often destroy families and turn life-long friends into the bitterest of enemies. These disputes are often resolved either in court or arbitration or through a Pyrrhic settlement after enormous litigation costs are expended.
For that reason, our firm counsels clients to seek legal counsel BEFORE going into business. The best way to avoid the destructive effects of these disputes is to PLAN to avoid them. Business partners can plan to avoid future disputes by crafting clear partnership, shareholder or operating agreements between the parties which will govern their relationship through the lifespan of the business enterprise. In my experience, many of the disputes that I litigate could have been avoided only if the parties had sought competent legal counsel before they embarked on their business life together. In most cases, by the time it gets to me, sides have been taken and battle lines have been drawn. The business has operated for years and has been built into something that was now worth spending hundreds of thousands of dollars to litigate over. Most of these disputes arise out of long-smoldering differences of opinion over issues of fairness and differing expectations over the parties’ respective roles in the enterprise. These differing expectations can be best resolved at the business’ inception by the parties execution of a clear contract governing the parties business relationship together.
So, before going into business with a partner or partners, plan for the worst and seek the advice of a competent corporate counsel to represent your interests in order to document in a comprehensive agreement you and your prospective business partner(s) respective duties and responsibilities in the planned enterprise. While the existence of a clear agreement will not avoid every business dispute, at the very least, it may make that litigation much easier to resolve in the unfortunate event that litigation is unavoidable because the reviewing tribunal will have clearly articulated guidelines to interpret and enforce among the parties.
Pictured Gregory A. Lomax.
If you need legal counsel regarding disputes involving partnerships, closely held corporations and limited liability companies, contact Gregory A. Lomax at 856-232-1682 or firstname.lastname@example.org.