A Happy Business “Marriage”
Planning and communication are keys to a successful long-term relationship.

By Rick Gier

The similarities between going into business and getting married are helpful in explaining co-ownership of a business. We will take John and Martha, our prospective business owners, through the steps that co-owners should follow to improve the chances of a long-lasting and successful relationship.

Dating: Getting to Know Each Other
John and Martha should get to know each other and be comfortable with each other’s strengths and weaknesses. They should start a business together only after considerable thought, open communication and an appropriate “dating” period. They should agree on the goals and vision for the business. They should co-write the business plan and agree about the direction they want for the business.

Pre-Nuptial Agreement: Agreement Between Owners
After deciding to join forces, John and Martha should address what they want to happen during and at the end of the relationship, a pre-nuptial agreement of sorts for the business. The form of this agreement will vary depending on the business entity selected, but the basic contents are the same. At a minimum, John and Martha should address the following events:

•    Death of a co-owner
•    Disability of a co-owner, leading to inability to contribute to the business
•    Divorce of one of the co-owners
•    Debts or bankruptcy of a co-owner
•    Disagreement leading to deadlock

An agreement among owners should prevent the transfer of one owner’s share of the business to a third party without first giving the other owner an opportunity to purchase the business. These types of provisions help Martha avoid finding herself in business with John’s widow, heirs, ex-spouse or creditors. The owners’ goals and priorities may change over time, leading to disagreements about the direction of the business. Co-owners should recognize this possibility and make arrangements up front, rather than waiting until they have difficulty reaching agreement on an issue.

Particularly useful is a provision under which one owner sets a price for the business and forces the other to decide whether they want to buy or sell their portion at that price. This results in a fair valuation because the owner setting the price will not want to pay too much or sell for too little.

Numerous scenarios can be anticipated and arrangements can be made in advance to address them in a rational manner. Co-owners may revise the agreement at any time as long as both agree to the new terms.

Wedding: Business Entity Choice
John and Martha need to discuss what type of legal entity will be best for their business. General partnerships, limited liability partnerships, corporations and limited liability companies all may be viable alternatives. The decision is generally made based on the entity’s ability to:

•    Limit personal liability of owners for business liabilities
•    Minimize income and employment tax obligations
•    Minimize cost and complexity of forming and maintaining the entity

Although a general partnership is relatively easy to start and manage, it does not offer separation between the liabilities of the business and the owners’ assets. In contrast, limited liability partnerships, corporations and limited liability companies offer significant protection of owners’ assets from business liabilities, but they are more costly and complex to form and maintain. Tax savings opportunities exist with some entities, depending on the profitability of the business. John and Martha should also look into the future and anticipate ownership changes that may occur. They should prepare realistic financial projections and risk assessments for their business and discuss them with an attorney, who can assist them in making the right choice for business entity.

Daily Life: Operations Plan
John and Martha will need to have an operations plan—a guide to how they will operate the business on a daily basis. They should make a list of tasks that need to be performed and determine who will do them. They can have others do some tasks for them, either by hiring employees or paying outside specialists to perform those services. They also need to set limits regarding decision-making and control of the business to achieve the proper balance between them. They should prepare a list of actions that can only be made with consent of both owners (e.g., signing contracts valued over $5,000 or lasting more than one year). Limits should be placed on check-writing capability as well.

Until Death (or Buy-Out or Dissolution) Do Us Part
If properly addressed in the agreement between the owners, the end of the business relationship through death, disability, financial hardship or any other reason need not be an end to the business itself. Attention to these steps will contribute to the success of John and Martha’s new business and avoid many later disputes. They may even live happily ever after.

Rick Gier is an attorney and small business owner who serves small business clients in Kansas and Missouri through the Law Office of Richard E. Gier, P.A. in Overland Park. He can be reached at (913) 239-8902 or or by visiting www.GierLaw.com.