I have heard more than once from someone asking if I had some boilerplate type of document which they could use as a framework for their own particular need. It could be a marketing piece, a lease agreement, or as recently happened, a partnership agreement. The thought behind this is along the lines of looking at what someone else has done and just copying the applicable (in their minds) paragraphs and perhaps inserting a thought or two of their own to come up with a document for their use.
The trouble with that theory is…
a. You are placing implicit trust in someone else that may or may not know what they are doing.
b. You are attempting to do most of the work yourself even though you are apparently unqualified or at least not expert in this particular task.
c. Your motivation is to minimize the fees that a professional might charge to do this; thinking in simplistic terms such as ‘hey, it can’t be that hard’.
d. The ever present ‘gotcha’ of “you don’t know that which you don’t know”. In other words, if you are unaware of certain options or, worse, if your chosen advisor or professional is unaware of certain options; then your resultant framework will be correspondingly weak and perhaps expose you to potential liabilities that you haven’t had the opportunity to consider.
When two or more people get together on a business idea, their knee jerk reaction is often “Hey, let’s form a partnership”; not even realizing that there are partnerships, Limited Partnerships (LP), Limited Liability Limited Partnerships (LLLP), etc. Each has definitive characteristics which may or may not accommodate your ultimate needs. Further, there are other business forms which people might not consider; thinking naively that they are more expensive, harder to accomplish, or just too technical and unnecessary. Perhaps a Limited Liability Company (LLC), a stock corporation, or a sub chapter S corporation would have desirable benefits. Sometimes people tend to over simplify their needs thinking expeditiously rather than strategically.
When I consider starting up a new business I explore my vision for both the start up phases and future operations. I’ve owned partnerships, LLC’s, and Corporations, as well as sole proprietorships. All exist in the business world and entrepreneurs need to learn the subtleties and benefits of each. There are reasons why one may better suit you than another, and failing to explore them is a disservice to yourself as well as all the other stakeholders in your company, including your family.
The partnership idea often comes as a result of initial discussions between the founders and goes something like this:
“Ok, so we’ll set up this company and we’ll sell this product or service. We’ll split everything equally and we’ll call it…”
Does that sound familiar? That’s generally where the first problems arise, or at least that is the source of what can become future problems. Nothing could be as simplistic as starting off with the notion that “we’ll split everything equally”. It’s just not logical and I’ll explain why I feel that way. People change. All people change, and that in itself is a neither good nor bad thing. It is just a fact of life. When married people change they do one of two things. They either adapt to one another so that their changes are more or less in sync or in the same direction; or they decide they are travelling in different directions and seek a separation or divorce.
Partners often find themselves in similar situations, although separating a partnership is often much more complicated than, and at least as catastrophic as a divorce. The source of these situations can often be traced back to that concept of equality which, more often than not, ends up being questioned or disputed by one or more of the partners. Why?
The answer is relatively simple and stems from initial perceptions in starting up the company. Often equalities are subjective. Sure, you can agree to pay each other equally, and you might also agree to invest equally; at least in the beginning. But that is where equality usually ends. Sooner or later one of you is going to notice or suspect that you are putting in more than your fair share. You are either working harder, contributing more to the success of the company, or are simply shouldering more of the “burden”; at least in your mind. From this point things decline; sometimes quickly or sometimes over a period of years. Nonetheless, that down slope continues and rarely levels off.
To minimize the potential for eventual dispute, I suggest fashioning an agreement based on two principles.
First, think of everything. Right now you are thinking I’m nuts, no one can think of everything. You’re right, no one person can; but a group of people have tried and their framework has been revised over the years and stood the test of time. It is the Revised Uniform Partnership Agreement* (RUPA). This is a set of regulations that will, in fact, govern your partnership should you fail to write an agreement in the first place. Many companies fail to do this and don’t realize that their failure invokes this standard set of rules should conflict or dispute arise. So read this set of regulations and adopt those which are appropriate for your organization and adapt or change those which aren’t. You can change much of the RUPA simply by agreeing to do so in writing, and this framework will help you formulate an agreement. This one step will increase your business’s chance of success exponentially!
Second, develop a dual compensation plan. Do not go into business thinking everything is always equal. Just as the tooth fairy seems to leave us during our later childhood years, so will your sense of fairness should you fail to do this crucial thing. There are, in my mind, two distinct relationships you will have with your business, partnership, LLC, or whatever.
• You will be first and foremost an investor. If you can’t get your head around this concept, you have probably not created a business plan detailing the customer needs that you will fulfill nor how your company will profit from doing that. Notice I say “how your company will profit”, not you personally. Your company will become an entity no matter which form of business you select, and it will be treated as such by others. The days of “Joe the handyman” just don’t exist any longer in any significance.
• You will also be an employee of one type or another. A partner can be a senior partner sharing in all the decisions of any import or however you care to define it. But usually in a small company you will also serve some function(s) and those should be described as well. And, you should earn commensurate pay accordingly. This can be as simple as a salary for X amount of hours. I would adjust the pay scale so that it has some relation to the market. In other words, suppose one of the partners is going to assume the job of manager of operations; perhaps both of you will. That job should be defined with a job description and pay scale just as any other job would be. Let’s say it is worth $60,000 per year for the standard work week as defined in the job description (40 hours?). Now let’s say further that after a year or two it has turned out that this job requires regular periods of overtime. Treating this as any other job would dictate that overtime be paid. Why not? If you lost that partner and had to replace them, the market would dictate such payments normally, right?
The whole point here is to mimic the employment marketplace with your own jobs as best you can and as closely to what you feel logically applies and is reasonable. With both partners on the same page at the start, it then leaves less chance for conflict or disagreement later since it is all laid out in the written agreement. This also allows the partners to think of their inputs in relation to value added. Just as a redundant employee would be reassigned or terminated, so should tasks assigned to partners if those tasks become either irrelevant or better done by a less expensive employee.
As you can probably now see, copying someone else’s agreements or even mimicking selected parts of others’ agreements can be a really bad idea. Start your business off on the right foot and give yourselves the advantage of logical planning. A little effort expended now can save an enormous amount of grief and stress later. I promise you, every ounce of planning effort expended now will pay off many times over in the years to come.
At this point I’ll add the standard disclaimer that I’m not a lawyer and I’m not attempting to give anyone legal advice. What I am doing, though, is urging you to speak with your lawyer (preferably one who is experienced in business structure law) and ask them if they are capable of helping you create a partnership or business agreement which is suitable for your particular use. Make sure you include other advisors in these decisions as well such as your accountant and trusted business advisor. You do have one of those, right? It would be a shame to face the business world without the essential resources competing companies most likely have.
* RUPA – Access to the RUPA as of January 2009 via the following link.
http://www.law.upenn.edu/bll/archives/ulc/fnact99/1990s/upa97fa.htm
Also, see your particular state’s ratification or version of this act for details which may be applicable to your particular state.
Bob Banasik is a senior business advisor and an accredited associate of the Institute for Independent Business, and can be reached at bob@bestbusinessassociates.com .
© 2009 Best Business Associates LLC
Thursday, January 8, 2009
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