Why it's important to plan business partnerships carefully

By Clive Halperin, Guardian Professional, 15-11-2013

If you're going to go into business with someone else, it's crucial that you plan for any eventuality

Starting your own business can be a very exciting time. Perhaps you're using a redundancy payment to fund it or you've borrowed some money. Or maybe you've just left school and are working on that unique app that's going to change the world.

If you set up on your own it's easy: you have only yourself to answer to and only yourself to blame. But understandably many people want to set up in business with a partner, or sometimes several. And that's when it's important to consider how the relationship should be carried on, to help avoid later problems. You should also think about what happens if it goes wrong, then document everything formally.

Many people setting up in business don't bother. First, there is an expense at a time when the success of the new venture is uncertain and money is tight. And like a pre-nup agreement between a couple, it invites all those questions which people starting up in business together may prefer not to deal with because it, in part, contemplates a breakdown in the relationship. But proper documentation at (or at least near) the outset can result in a huge saving in cost, expense and headache because shareholder and partnership disputes can cost many tens of thousands of pounds.
Many entrepreneurs choose a limited company structure, a partnership or limited liability partnership; regardless, it's sensible to have a formal agreement dealing with potential issues. The daily running of the business and ordinary life events also play a part in what should be covered in the agreement. How decisions are made is as important as how to resolve a dispute or deadlock. What if one of you wants to sell out but the other doesn't? And what happens if someone dies, becomes ill or just wants to quit and do something else?
Importantly, the default legal position often does not adequately deal with these issues, or deals with them in a way that does not suit the parties. For example, if one of the shareholders dies, the remaining shareholders may find that they are suddenly in business with the spouse or children of the deceased.
Business partners often believe that if there is a disagreement or deadlock, the practical necessities of carrying on the day-to-day business will mean that a pragmatic solution is reached – even if the relationship is a bit frosty. And more often than not, that is what happens. But not always. Sometimes it's more like a nasty divorce where emotions are running high and perhaps years of resentment result in irrational behaviour.
But even if there are many different scenarios, the areas that should be considered are similar. Here are some tips as to what your documentation should cover:
• Work out who is doing what and how the venture is being funded; what happens if these obligations can't be fulfilled?
• When are any loans to be repaid?
• How are decisions made? Who are the directors?
• What if you can't agree? How should these disagreements be resolved?
• How much dividend is to be paid out? How much profit should be retained for future business? How are salaries agreed?
• What happens if a party dies or becomes unable to work or simply wishes to retire?
• Should certain activities require unanimity or a specific majority vote?
• What if further funding is needed?
• How can you sell your shares, if at all?
Take some advice from someone experienced in these areas –>>>