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You are here: Home / Stories / Rob on What You Need to Know When Forming Partnerships

January 4, 2018 By Rob Henry

Rob on What You Need to Know When Forming Partnerships

You’re thinking about going into business with partners. That’s great, but there are some things to keep in mind as you form the business or partnership.

The Worst Advice

I hate to say this, but you need to understand that if you hire an attorney to represent you in drafting documents, that attorney represents you – not the business. If another partner hires an attorney, the attorney represents that partner – not you. A lot of attorneys aren’t good at disclaiming that.

Just remember – the attorney represents the person or entity who hired him, and only that person or entity. There may be a scenario where he’s representing more than one person, but there is absolutely not a scenario where he’s representing everyone involved. Understand that you are not represented when you don’t hire the attorney.

Sometimes, it doesn’t matter. Most partnerships don’t get nasty. Breakups aren’t bad. Lots of times, the fact that you aren’t represented when forming the partnership doesn’t matter at all. The thing is – you don’t know that in the beginning. You won’t know unless it happens, and that’s the main thing.

So the question becomes – do you need to have an attorney help you go over the basic partnership document? I don’t know. That’s a personal decision. But, I will say that if someone else is being represented, you definitely need to pause and consider that the attorney isn’t representing you.

Ensuring Equal Distribution of Responsibility, Risk, and Reward

Now, how do you keep the business going? How do you ensure that the talent, the financial backer, and anyone doing sweat equity all do what they say they’re going to do? A lot of times, there’s not really anything you do. You can put something in the agreement, but that doesn’t guarantee anything.

If the business is doing great and everything’s rocking along, everybody will be happy. But there are situations where someone isn’t happy with the other partners. There are other situations where it’s a matter of ego. What I see the most is that someone in the partnership thinks they’re doing all the work. In that case, all the partners need to sit down and evaluate whether everyone’s pulling their own weight. Communication is key, no matter what business you’re in.

There are also cases where one partner, whether the talent or the business knowledge, feels that he’ll be better off on his own. When you’re forming your partnership agreement, think through this scenario. Make sure you include a good, sound way to buy that partner out or simply end his involvement. Keep your covenant to compete up to date, as well as confidentiality and nondisclosure provisions. Even if you think it’s impossible for anyone to ever want to leave the partnership, keep in mind that you may be happy now, but in a few years, egos or other things may change, and partners may want to move on. Businesses do sometimes break up, and you have to be prepared for that.

Other Considerations

Probably the three most important things to consider when forming your partnership agreement are noncompetes, confidentiality, and nondisclosures. Those three provisions protect your proprietary information. Now, when I say proprietary, I am not just talking about scientific data the company owns. This includes your price lists, market information, and research and development. I am talking customer lists and client information. These provisions protect all of that.

If you don’t have a good provision in your partnership agreement, your former partner could start reaching out to those customers and vendors. They could start talking with them about pricing. What most of those partners don’t realize is that yes, they were there and helped build the business and get the partners in, but that information belongs to the business, whether it’s a partnership, LLC, etc. It doesn’t belong to the partners individually. You need to make sure the partnership is protected in the beginning, and not when a situation like this actually happens.

So there you have it – protect yourself, protect your time, and protect the partnership itself. Make sure all those provisions are in place when you form the partnership, and communicate to keep the business going.

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Hey! I’m Rob. I am a Personal Injury/Civil Trial Attorney based in the Dallas/Fort Worth Metroplex area.
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