Advice

What to Do if You Don't Trust Your Business Partner


Question: I am planning to start a small septic business with a co-worker. He has the main two licenses that are needed, and I only have one of them. What keeps him from starting a second business behind my back with someone else? He is not trustworthy.

Answer: There are legal documents such as non-compete and non-solicitation agreements you could investigate, but when it comes down to it, you really can’t prevent someone from opening a business without telling you. And if you don’t trust this co-worker not to undercut you, he’s probably not someone you want to go into business with at all.

Entrepreneurs often compare a business partnership to a high-powered marriage, with each individual bringing certain assets to the table. But if there are trust issues even before the wedding, the union isn’t likely to last long.

Your best choice may be to get the remaining licenses yourself and start the business on your own. Or you could find a partner that you respect and trust.

Even if you find a better candidate, you should still do due diligence before forming a partnership, says Hanna Hasl-Kelchner, a business attorney and founder of consultancy Business M.O., in Chapel Hill, N.C.

Many of the most egregious embezzlement and fraud cases are perpetrated by someone everyone in the business thought they could trust. “If you’re entering into business with somebody on a partner level, you might want to do a background check,” Hasl-Kelchner says. “If you get a bad vibe, use that information—whether it’s someone you’re doing business with, extending credit to, or partnering with.”

Certainly before you form a partnership with this co-worker or anyone else, you should have legal structures in place to protect both of you. “Have a good, solid partnership agreement drafted by an attorney and make sure everything in the business is registered under both of your names,” says Karen Tegger Ward, a business attorney at InnovaCounsel, in Irvine, Calif. “Have everything from bank accounts to insurance contracts to work orders executed in the name of the business. In order to protect yourself from legal liability, structure the company as an LLC or corporation.”

Talk to an attorney about whether you need a written operating agreement that sets out each partner’s areas of expertise and responsibility. A shareholder agreement or another document that establishes a process for unwinding the partnership—for any reason—could also be a good safeguard. “What happens if you disagree or have a total falling-out? What could trigger that? You want to think through all the possibilities,” says Hasl-Kelchner. “Talk to a professional who can help you plan for this as a long-term relationship, which is what a partnership really is. It’s not just jumping into bed for a one-night-stand.”

Karen_klein
Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

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