According to recent Small Business Administration data, approximately 80% of new small businesses survive the first year, while only approximately 33% make it to 10 years. One of the most common reasons for small business failure in years 2-10 is business partnership disputes.
In an LLC setting, business partners are referred to as “owners” or “members.” Those terms are synonymous with partners for this article. When the owners of a small business are fractured, the small business cannot survive. Naturally, the question is then, how do you avoid business partnership disputes? In a coming article, we will also answer how to litigate business partner disputes when they are necessary.
First, it is important to understand that it is not bad to join forces with another person (or people) to get a small business off of the ground. It can take the skills and resources of more than just one person to get a small business running and to market.
The old proverb rings true: “If you want to go fast, go alone. If you want to go far, go together.” This is nowhere truer than with a small business. However, there are some things you can do to avoid business partner disputes as a small Arizona business when you chose to “go together.”
1. Vet Your Potential Business Partners
Just as you should not marry someone without getting to know them first, you should spend some time getting to know your potential business partner(s). This will be a person that you spend the most time with, the person who will have access to the company money, and the person who will be responsible for your future success.
Many small businesses are started on a good idea, but not with the right people. Take time to find the right people. If you are unsure whether your business partners are a good fit, then we would be happy to meet and discuss what benefits and pitfalls await with your potential business partner.
2. Put Your Business Partnership Agreement in Writing
This is like the blueprint for a house. Without a clear understanding between the business partners as to what is going to take place with the business, confusion, and distrust usually follow. A partnership agreement does not need to be complicated. It should, however, spell out how much ownership each individual holds, what is being contributed by each partner what happens if things go well (and conversely if things do not go well), and how the day-to-day operations of the business will be handled.
3. Avoid 50/50 Ownership
Many business partnership disputes stem from a deadlock between two 50/50 owners. Common issues include concern whether a particular client would be a good fit for the business, whether to take out profits or to reinvest them in the company, what to do if a partner moves out of state, or even who to hire to fill key positions. When a deadlock happens, it can make it so that the company cannot function.
4. Put a Safeguard in Place to Decide on How to Resolve Disputes
In any business partnership agreement, you should have detailed how disputes will be resolved. If ownership is 50/50, then it is critical to have a tie-breaker mechanism such as consulting with a trusted friend of both parties, flipping a coin, or including the owners’ spouses in the decision.
5. Mitigate Risks
Stress caused by unnecessary risk causes fractions between business partners very quickly. Having proper accounting help (particularly for taxes), proper insurance, and ensuring you are complying with applicable state and federal laws is critical to reducing unnecessary stress on a partnership.
6. Trust, But Verify
While it is critical to have trust in a small business partnership, you should always be familiar with all the aspects of the business, particularly the financial/accounting matters. Money is often thicker than blood when it comes to small businesses partners.
Contact Counxel Legal Firm
In order to get your Arizona small business going with your business partner, take a look at the “New Arizona Business Owner Checklist” and “Get the Right Legal Documents for Your Business.” We would love to help you avoid unnecessary business partnership disputes! Contact us at (480) 744-6621 or at request@counxel.com. Don’t forget to check out the good things that others are saying about the services they received from Timothy Coons on Google.
This article is intended for informational purposes only and does not constitute legal advice for your specific situation. Use of and access to this article does not create an attorney-client relationship between you and Counxel Legal Firm. Please contact request@counxel.com or (480) 744-6621 to request specific information for your situation.
*Conveniently located off the 101 Freeway and the US 60 in the middle of Phoenix, Scottsdale, Tempe, Chandler, Gilbert, Mesa, and Queen Creek!
