National Clothesline

ext year marks the 15th anniversary of my business, the law firm of Kollman & Saucier. When I started the business in 1988, a good friend in a successful business offered me as much money as needed, provided I did not take a partner.

Law firms, unfortunately, do not work that way. Partnerships are the norm. And many businesses start out with two or more people, many times employees who worked together in a prior business, deciding to strike out together. Many business partnerships work, but many more fail.

In many instances, the partnership goes sour before the business does. One partner works harder, is smarter, or is nastier than the other. Before long, they are barely talking to each other.

Only rarely do these fallouts not affect the business. Sure, there are plenty of examples where business partners thrive despite not having exchanged a civil word in years.

For the most part, however, the business suffers along with the relationship. Morale among employees is almost always a casualty.

There are things a business can do to make these break-ups easier. Where these devices are in place, the break-up may be just as nasty, but the break-up is not accompanied by litigation over who has the right to do what.

First, as most people know, traditional general partnerships are hardly ever used anymore. Most businesses are corporations or limited liability companies, and "partners" are either shareholders or members. So, your business partner is not your partner — more than likely, he is your fellow shareholder.

It is essential that you have a shareholder's agreement with your "fellow shareholder.” It works like a prenuptial agreement, setting out what happens if one person quits, dies, wants to sell, or just stops performing. It describes how the business is valued, how a buy-out by another shareholder works, and financing arrangements. As the business progresses, it should be reviewed from time to time to see if it still works.

Remember, what worked when the business was worthless and new may not work when it is worth several million dollars.

Control is always a major issue in these corporate battles. Shareholder agreements are more important to minority shareholders, though a majority shareholder may need to get rid of pesky minority stockholders.

Such agreements need to make it easy to effectuate a buy-out of the other business holders, while at the same time balancing fair compensation against the ability of the business to afford the buy-out.

If you have not sat down with your corporate lawyer since you formed your business, call him or her to discuss:

A. Is your minutes book up to date?

B. Do you need a shareholder's or buy/sell agreement?

C. Do you need to do some estate planning related to the business?

D. What happens if you and your business partner want to part company? What happens if you cannot agree?

E. Is my business protected if my partner leaves the business for whatever reason?

The meeting may prevent a lot of heartache later.

Frank Kollman is a partner in the law firm of Kollman & Saucier, PA, in Baltimore, MD. He can be reached by phone at (410) 727-4300 or fax (410) 727-4391. His firm’s web site at www.kollmanlaw.com has articles, sample policies, news and other information on employee/employer relations.