Joy of Customized Partnership Agreements

Dúo by Hernán Piñera from Flickr (Creative Commons License)

A contract is a “relationship management document.” A well-written contract should put everyone involved on the same page and protect both sides. A contract should provide clear explanations to help the parties avoid confusion and prevent problems. It’s an effective way to document the priorities and goals in the relationship.

You can put anything you want in your contract as long as it’s legal. (I’ve written a legitimate contract where one party had to attest that they are “a sexy bitch.”)

The Roommate Agreement: The Epitome of Customized Agreements
One of my favorite contracts is the Roommate Agreement between Sheldon and Leonard on The Big Bang Theory. It’s a perfect example of how contracts can be customized (and how important it is to define words in your contracts.) Here are some of my favorite provisions of the Sheldon-Leonard Roommate Agreement:

  • Once a day, Sheldon must ask Leonard how he is (even though Sheldon doesn’t care).
  • No “hootennanies”, sing-alongs, raucous laughter, clinking of glasses, celebratory gunfire, or barbershop quartets after 10.p.m.
  • If one friend gets super powers, he will name the other one as his sidekick.
  • If one friend gets invited to go swimming at Bill Gates’ house, he will take the other friend to accompany him.
  • Once a year, Leonard and Sheldon take one day to celebrate the contributions Leonard gives to Sheldon’s life, both real and imaginary.
  • One friend has to put up with the other’s craziness. (Yes, we know: Sheldon’s not crazy. His mother had him tested.)

I love this contract. Not only is it hilarious, it shows what a contract can be.

My Partnership Agreement
If I owned a business with a partner, we would have the best owner’s agreement. Besides the provisions about how we were going to resolve deadlocked votes when a unanimous decision is required and the division of administrative tasks, we’d customize our contract based on our personalities and priorities. Here are some provisions I’d advocate for:

  • We won’t use vendors who are known to be sexist, homophobic, racist, or who treat their workers poorly.
  • No jerks. This applies to vendors and customers who want to hire us.
  • Our office will always be dog-friendly.
  • If we’re driving somewhere together, Ruth doesn’t have to drive.
  • There is only one way to say “data” correctly in Ruth’s presence.
  • If you’re sick and contagious, stay home. Keep your germs to yourself.
  • Neither owner is allowed to do their own taxes. Let the professionals do them.
  • We will have a monthly meeting to discuss the state and future plans for the company. If either owner is 10 minutes late or more, they have to buy the other lunch.

When I write partnership agreements, operating agreements, and bylaws for companies, I have a set of questions I make my clients answer to assist me in drafting a contract that fits their needs. One of the questions is “What else do you want me to include?” and I encourage my clients to be thoughtful and creative, based on their needs and their goals for their business.

If you’re interested in getting a custom contract, you can contact me directly or a business lawyer in your community. I regularly post about legal issues impacting entrepreneurs on TwitterFacebookYouTube, and LinkedIn. You can also get access to more exclusive content that is available only to people on my mailing list, by subscribing here.

Choosing a Business Partner – Bet on the Jockey, not the Horse

Lone Star Park by Travis Isaacs (Creative Commons License)

Lone Star Park by Travis Isaacs (Creative Commons License)

When it comes to deciding who will be your business partner or a business investor, choose your associates with as much care as you would a romantic partner. When it comes to selecting these people, don’t you just look at their reputation, their track record, or their wallet. Look at who they are as a person. Look at how they work in relationships with others, their values, and their personality. If you are going to be intimately involved with this person from a business perspective, it should be someone you enjoy being around and who has values and goals that are compatible with yours.

When Gary Vaynerchuk evaluates startup owners and businesses for investment purposes, he says he bets on the jockey, not the horse. That makes perfect sense because there are times of great ideas out there but a much smaller group of people who can take one of these ideas and execute on it in effectively. As Gary would say, “Ideas are shit. Execution’s the game.

Think of your business relationships as a “business marriage.” These are people with whom you will be legally connected and have fiduciary obligations to each other. And if things don’t work out, you will need to get a “business divorce” where one partner buys the other out or when the partners decide to shut down the business and divide whatever assets are left. I’ve worked on collaborative divorces where the owners realized that they could no longer work together on a business but they could agree on what terms they wanted for their separation. I’ve also worked on contentious business divorces where each side has legal representation and the contract negotiation is longer and the parties are much more antagonistic.

In many cases, many problems in a business relationship or the business divorce could have been avoided had the parties verified that they were on the same page from the beginning of the relationship regarding their goals, how they were to run the business, and how they will resolve problems. Unfortunately, too many people use poorly written contract templates they find on the Internet or proceed without one at all. They don’t understand that it is cheaper and easier to write an effective contract with a lawyer at the big getting of a business relationship then for each side to have to hire someone to negotiate their business break up when things don’t work out.

Choose your jockey (business partner) with care. If they treat other people poorly, they will treat you poorly. If you think you can manage or manipulate a person’s behavior, you are already asking for trouble. If your prospective partner balks at the idea of solidifying your relationship with an operating agreement or investor agreement, turn and run away. No one’s money is rich enough to make up for the headaches and heartbreak that result from not having a proper contract in place. In fact, the appropriate response to a request for a contract should be something along the lines of, “Duh.”

If you want to chat more about the importance of business contracts or how to write one to accommodate your needs, you can contact me directly or connect with me on TwitterFacebookYouTube, or LinkedIn.

Lawyers Protect you during a Business Divorce

Pareja (Couple) by Daniel Lobo from Flickr (Creative Commons License)

Pareja (Couple) by Daniel Lobo from Flickr (Creative Commons License)

Over the last six months I’ve worked with a handful of companies that were experiencing major changes in regards to how the company is operating and who the owners are – usually resulting in one or more owners buying another one out. Sometimes the owners realize that they no longer have a shared vision and can work together amicably to resolve the situation so they can each move forward in their professional lives and sometimes it’s quite contentious. I often call the situations “business divorces.”

When these situations happen, it’s helpful to get a business lawyer involved early in the process. You may only need in our consultation to discuss the situation in your proposed plan of action. Your lawyer can act as a neutral third party who doesn’t have invested ego in the outcome of the situation. Invite your lawyer to review your company’s operating agreement or bylaws (hopefully you have these) and remind you of what courses of action you previously agreed upon in this type of conflict (assuming you made these decisions when you started the company) and how to change the status of your business with your state’s corporation commission.

Most business owners I know don’t want to think about the worst case scenario when their businesses are just getting off the ground and everyone is optimistic about the future; however, this is the best time to have this conversation and document it because this is when you are most likely to be thinking about what is fair and what is in the best interests of the company. If you wait until there is a conflict to try to have this conversation, you’re more likely to get into a battle of wills where people are more interested in what they want and/or hurting the other person.

Additionally, if you are going through a “business divorce” expect it to take longer than you’d like. There may be valuations that need to be performed on the company, documents that need to be reviewed by your lawyer or accountant, and a custom contract drafted between you and your future-former-co-owner. This may involve a significant amount of negotiation and revisions.

I actually enjoy drafting these documents to shift the ownership of the company, especially when both sides are represented by counsel. Each lawyer is an advocate for their client’s concerns without it having to be a combative situation. And we can shield our clients from the tribulations that would likely result if they tried to reach a resolution on their own. Ultimately we both want the same thing – a change in business ownership and clients who are satisfied with the outcome.

If you are in a situation where the arrangement with your fellow business owners is no longer effective, please contact me or a business lawyer in your community. If you want to connect with me on social media, you can find me on Twitter, Facebook, YouTube, or LinkedIn.

Starting a Business in Arizona

Little Waitrose - Birmingham Snow Hill - Colmore Row - Now open - sign by Elliott Brown from Flickr (Creative Commons License)

Little Waitrose – Birmingham Snow Hill – Colmore Row – Now open – sign by Elliott Brown from Flickr (Creative Commons License)

Starting a business is exciting and can be overwhelming at times with everything that has to get done. I wish more business owners put more energy into creating structure within their business when they contemplate and launch their endeavors. It will save a lot of pain and frustration in the long run. If your plans for 2015 include starting a business, make sure these steps are on your to-do list in the first month or two of starting your company.

Discuss with your accountant what type of entity you should form. Every company needs an accountant. In Arizona, you have the option to create a C corporation, an S corporation, a B corporation, or an LLC. I tell all my clients to meet with their accountant to make sure they select the right entity and understand the corresponding tax implications and other responsibilities.

Check with the Arizona Corporation Commission and the U.S. Patent and Trademark Office to ensure that the name you want for your business is available. Many companies make the mistake of assuming that just because the website domain they want is available that their desired company or product name hasn’t been registered as a trademark for another company. If you use a name that has already been registered by someone else in the same or similar industry, they can make you rebrand.

Submit the necessary paperwork and fee with the Arizona Corporation Commission. Consider filing your trade name with the Secretary of State’s Office as well. The forms to file your Articles of Incorporation or your Articles of Organization are on the Arizona Corporation Commission’s website. Make sure you get all the supplemental forms you need. The standard filing fee is $60 for a corporation and $50 for an LLC. The filing fee to register a trade name with the Secretary of State is $10. (Registering a trade name prevents other companies in Arizona from using the same name. It is not a substitute for filing a federal trademark.)

Create a separate bank account for your business and set up your accounting system. It’s imperative that you keep your company’s corporate veil intact. I strongly recommend using an accounting system like QuickBooks. It makes life so much easier when you’re reviewing your books and preparing for taxes.

If your LLC has more than one owner, create an operating agreement. If you have a corporation, write your bylaws. These documents will dictate how you will run your business, including how you will divide responsibilities and how you will address problems when they occur. They will help you decide in advance how you will address situations that are likely to occur.

Create the contract templates you will need for your business. If applicable, write the terms of service for your website. If you are going to be hire to provide a product or service by multiple customers, you will want to have contract templates for those interactions. This creates consistency and uniformity which will help you build your reputation as well as be more efficient. You can customize your templates to suit your needs. I encourage business owners to look at others’ templates for ideas of what they might want to include but be leery of using someone’s template unless it’s been reviewed by your lawyer.

Discuss what intellectual property your business will or might create and what strategies you will use to protect it. Every business has intellectual property: copyrights, trademarks, patents, and trade secrets. It’s often the company’s most valuable asset. It is important you understand what you have and the best ways to protect it.

Ideally, you would have a lawyer involved from the beginning of your business, if only to tell you what you should do and when you’re better off hiring a lawyer to work for you. Even if you’re on a shoestring budget, you can find a reasonably priced business lawyer or resources for startups to assist you. It’s also prudent to schedule an annual consultation with your lawyer to educate yourself about what legal issues might be on the horizon and to get advice about what more you should do to protect your business as you have the ability to afford it. It’s easier and cheaper to prevent problems than to clean up the mess when something bad happens.

If you want to chat with me about starting a business in Arizona, feel free to connect with me on TwitterFacebookYouTubeLinkedIn, or you can email me.

Please visit my homepage for more information about Carter Law Firm.

Be Wary of Downloading Contract Templates

Copy Taste by Maik Meid from Flickr (Creative Commons License)

Copy Taste by Maik Meid from Flickr (Creative Commons License)

One of the questions I frequently get at my speaking gigs is where can people go to find good contract templates online. This question makes me simultaneously happy and nervous. On one hand, I’m happy that the person is asking about their contract needs; however, I’m nervous that they think there might be an acceptable resource online that could replace proper legal advice.

I usually tell these people that contract templates from the internet are a good place to start when doing research on a type of contract and the types of provisions they should include in their agreement. It should be the beginning of their search, not the end. When you look at a contract template online you can never know for sure who wrote it, where it came from, or whether it would be suitable for your needs. There have been many times when I’ve seen someone using a contract for their business that had provisions that made no sense – like a 2-person business that had an operating agreement that required a 2/3 vote to make changes and an Arizona-based business that was using a contract that said the agreement was governed by New Jersey law.

Instead of looking on the internet for a template, you might be better off asking your colleagues in your industry if they would be willing to share their contract templates, depending on where they got them. You are more likely to find provisions that are applicable to your business and the practices of your industry.

Regardless of where you get your templates, it’s always a good idea to have a business lawyer review them before you use them for your company. Otherwise you may find yourself using a contract that is bad for your business, and as long as the provisions of the contract are legal, you could be stuck with it. It may not be as expensive as you think to have a lawyer review your contract in advance. I’ve always said it’s cheaper to hire a lawyer in the beginning to prevent problems than to have to hire one after the fact the clean up the mess.

If you don’t already have a contract template you’re considering using, talk with your lawyer about whether it would be more cost effective for you to find or create your own contract draft for them to review or simply hire a lawyer to create your contract from scratch.

And be equally leery of contract templates created and sold by lawyers. Some of these are good and some of these are crap. I saw an operating agreement this year that was created by a law firm that sells start-up packages for businesses. My client asked me to review the contract to help him resolve a problem with one of the owners. This contract was dozens of pages long, was filled with excessive legalese, and did not address all of my client’s needs; hence, he needed a hire me to help him fix his problem.

Best of luck to everyone whose plans for 2015 include starting a new business. Creating contracts to suit the needs of your business should be one of the many things on your to-do list. If you want to chat with me about your business plans for 2015, feel free to connect with me on TwitterFacebookYouTubeLinkedIn, or you can email me.

Please visit my homepage for more information about Carter Law Firm.

What Happens to your LLC when you Die

Headstone View by Augapfel from Flickr (Creative Commons License)

Headstone View by Augapfel from Flickr (Creative Commons License)

When you own an LLC or part of an LLC, you own property. This is property that will be part of your estate when you die. If someone came to me and said their business partner just died and they’re not sure what that means for the business, I would initially have two questions.

  • What does your operating agreement say in regards to this situation?
  • What does the deceased’s estate plan say happens to their portion of the business?

Hopefully both of these documents exist and give clear instructions. If you don’t have an operating agreement and the person didn’t have an estate plan, their portion of the business will pass to their relatives like the rest of their estate per that state’s law. Most likely, if the person was married, their portion of the business would go to their spouse. If they didn’t have a spouse, it would go to their kids. If they didn’t have a spouse or kids, it would go to their parents.

When I draft an operating agreement for LLC owners, I make them answer the hard questions like what happens if an owner dies or gets disabled and document their plans for addressing those situations at the beginning of their business relationship so they won’t be scrambling when they find themselves facing these issues.

If you are a sole LLC owner, you don’t need an operating agreement that tells you how you’re going to run the business, but you may want one to thoroughly document what you want to happen to the business when you become disabled or die. Make sure you document the pertinent information like where keys, passwords, and bank accounts are so your employees or loved ones can take over or wind up the business.

Once you have your estate plan and operating agreement in place, make sure you tell your family and whoever else may need to know where you put it so they can carry out your wishes. My Wills and Estates professor (who is a brilliant estate planning attorney) suggests you put them in a fire-proof and waterproof safe with the door unlocked (or the key in the lock). That way the documents are safe but if a thief gets into your business or house, they will quickly see that it doesn’t contain anything of value to them and leave it.

It’s hard to think about what should happen to your business if you die. If you work in an industry (like law) where a person needs a specific credential to be an owner, you may not be able to keep the business in the family but they could be charged with closing down your operation. Otherwise you will have to decide if you want the business to go to a family member, an employee, or a combination of people. You ultimately won’t have control over whether the business continues to exist, but you can put the documents in place to try to make it happen.

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Please visit my homepage for more information about Carter Law Firm.