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Smart Answers

A Lawyer's Advice on Business Partnerships

For two decades, Philadelphia attorney John Gerber has helped entrepreneurs start and build their companies. This summer, Gerber founded to provide legal guidance for downsized and retired professionals starting home-based consulting and service businesses.His 2010 goal is to sell 1,000 of the legal startup packages he has developed and earn $400,000 in first-year revenue.One of the biggest stumbling blocks for startups is properly structuring partnerships, Gerber says. He outlined the following essential partnership issues in a recent conversation with Smart Answers columnist Karen E. Klein.

Start with the end. Decide from the outset of your business what will happen if one partner exits. "This is one of those things most people never think about, but it's the most important, kind of like a pre-nup in a marriage," Gerber says. Think through the common reasons a partnership might break up: One partner might quit or need to take a job elsewhere; one might die or become ill and unable to work; there might be a dispute over finances or policies.

An operating or shareholders agreement should address all the possibilities and spell out the results of each scenario. Will the remaining partner retain ownership of the company? Will there be a buyout of the exiting partner? Under what terms? Having a legally viable exit plan before it is needed, and before emotions or animosity are running high, is invaluable, Gerber says.

Decide who decides. Put into writing how your company will be governed. Many times, partners share investment and responsibility equally and agree to decide major issues jointly. Other times, a majority or founding partner has ultimate control over the future of the company, while a junior partner reserves the right to veto major decisions, such as selling the company or bringing on a new partner. Whatever works for your firm, putting it in writing up front, Gerber says, can spare major confusion and grief in your day-to-day operations.

Protect the personal. Establish your partnership as a legal entity from Day One and protect the partners from personal liability. You also should address how profit will be split and how partners will be paid. "There's a world of variation here, from a 50-50 revenue split to each partner getting base compensation and then some kind of profit split," Gerber says. Again, deciding early on is key to operating a successful partnership.

Assess your commitment. "Everybody in a partnership starts with ideas about their commitment, but sometimes life gets in the way," Gerber says. Talk out competing priorities—children, extended family, other business interests—with your potential partners before you start working together. "You should have strong common understandings going in about what will happen about possible maternity or paternity leaves, or if someone in the family gets sick and a partner needs to take care of them," he says. You may agree to write formal policies covering these issues or not, but knowing how they'll be handled if they arise creates a sense of fairness and trust that gets a partnership off to a strong start, Gerber says.

Identify a legal adviser. Even if you've done conscientious prep work, there are a whole host of issues that can derail a partnership. Having an established relationship with an attorney can help, whether you need occasional advice, one-off representation, or decide to retain a lawyer as full-time or part-time counsel as your business grows.

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

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