A business partnership is one of the best ways to start a business. In this way, capital, experience, visions, and abilities are combined. The success of the business will depend mostly on this combination of strengths that each of the entrepreneurs contributes.
This is the time to establish a firm legal basis for the business. The truth is that many commercial companies end on very bad terms due to the lack of planning. Some elements to consider are:
Capital
It is very common to start a business among friends, and not to define from the beginning how to share capital. The lack of a formal agreement, where the divisions of capital are specified, can generate problems among the partners in the medium or long term. Ideally, there should be an association agreement between the partners that details how expenses and capital are to be divided.
A formal agreement should specify:
- Initial Contribution: How and how much each partner will contribute to the initial capital. Will it be in cash, kind, or assets? The value of each contribution should be detailed.
- Division of Shares: How shares in the business will be divided based on capital contributions. For example, a partner contributing 60% of the capital might receive 60% of the profits and decision-making power.
- Additional Contributions: What will happen if additional capital is needed in the future? How will new investments be handled? Will each partner contribute proportionally to their initial stake, or will another method be agreed upon?
- Reimbursements and Returns: How and when contributions will be returned if a partner decides to withdraw. This might include clauses on company valuation and the payment of reimbursements or benefits to departing partners.
Shared responsibility
Before certain commercial operations, the partners may not agree as to which assets to buy or what investments to make. This could generate a partner’s feeling that he is depending on the decisions of the other partners.
What measures can be taken?
- Establish a Clear Decision-Making Process: This could involve a majority vote, a specific committee, or unanimous voting for critical issues.
- Define Areas of Responsibility: For example, one partner might handle finances while another manages daily operations.
- Consider Forming a Limited Liability Company (LLC): This protects partners by limiting their personal liability to their capital contribution. This means personal assets are protected in case of debts or legal issues.
- Include in the Partnership Agreement: A contract that clearly defines each partner’s responsibilities in various situations and the impact of their decisions on the business.
Non-competition agreement
This is also a subject that is not given much attention when partners start a business. The ideal situation is to have an agreement that stipulates the prohibition of one of the business partners taking clients or confidential information from the company for their own benefit.
Specify which activities or industries are considered directc ompetition. This can include similar businesses in the same geographic market.
Define how long after leaving the company a partner cannot compete. This duration should be reasonable so as not to affect the partner’s ability to work in the future.
Establish whether the competition restrictions apply to a specific geographic area or nationally/internationally. Include clauses about the handling and protection of confidential information and trade secrets to prevent outgoing partners from using this information in their new ventures.
Distribution of Profits and Losses
First, it is essential to define the distribution model that will be applied. One of the most common methods is proportional distribution based on capital contributions. In this model, profits and losses are divided based on the capital each partner has invested in the business. For example, if a partner contributes 40% of the capital, they will receive 40% of the profits and bear 40% of the losses. This approach is simple and fair, as it is based on the financial investment made by each partner.
Another model is equal distribution, where profits and losses are divided equally among all partners, regardless of their capital contribution. This method may be suitable when all partners have a similar level of involvement and effort in the business and seeks to promote a sense of equality among them.
Additionally, a distribution based on work contributions can be considered. In this approach, not only the invested capital is taken into account but also the effort and time each partner dedicates to the business. For example, a partner who works full-time might receive a larger portion of the profits compared to a partner who only contributes capital. This method recognizes and rewards the work and dedication of the partners, beyond financial investment.
A flexible option is combined distribution, which mixes various factors such as the capital contributed and the work done. This model allows dividing profits and losses in a way that reflects both financial investments and non-monetary contributions. For example, a portion of the profits could be divided according to the capital contributed and another portion according to effort and dedication.
Exit strategy
Although it may seem paradoxical, the best time to plan the exit is at the beginning, while the parties have the same business vision and agree on most projects. Planning at the beginning will save problems later when the relationship is already worn out.
Support your process with a business lawyer
Agreements between parties in business partnerships are very complex, and improper planning can greatly affect interpersonal relationships. Avoiding legal errors at the beginning, will favor the success of the company and avoid costly and unwanted litigation.
Consult with a business lawyer whenever you consider a business association. It does not matter if this association is with friends or even relatives. A good commercial lawyer will provide advice so that all parties reach a favorable agreement before starting operations.