The Problem with Partnerships
At some point or another, it becomes necessary to have “the talk” and “define the relationship” within a business. While the thought of defining business roles may make some people nervous, not having a conversation is a source of even greater anxiety when the relationship involves an investment, business venture, or development project.
The problem, for many people, is that they don’t know what terms to use to define a business relationship or how to structure it other than as a “50/50 partnership.” Many people are reluctant to structure it in any other way because of a concern of looking “greedy” or because another structure could cause the other party to back out of the deal, thereby removing the capital necessary to make the project happen.
If you find yourself in these situations, however, you should know that there are many alternatives to a “true partnership” that may work better for all of the parties involved.
At the outset, the parties need to define their goals, and each should think hard about exactly what they would like to get out of it, both personally and financially. Is it a fixed rate of return? The desire to grow something from the ground up? An opportunity that could triple or quadruple the investment over time? Or something else? The basic structures available under the law are described below:
Joint Ventures
While the law generally treats a “joint venture” like a partnership in many respects, the parties to a joint venture acknowledge that their relationship is limited to a single project and does not extend to other business opportunities.
One of the main questions in defining a business relationship is understanding the extent of one party’s authority to speak on behalf of another. In other words, the question of whether one person is “an agent” for another in all circumstances or only in some circumstances.
The parties to a joint venture can create it through an agreement, including an oral agreement. While the statute of frauds generally prohibits agreements that are not to be performed in more than one year, a non-statutory exception to the statute of frauds exists for partnership agreements. As such, one issue often becomes what the parties actually agreed on. This is problematic because it can lead to a he-said/ she-said dispute about the terms of the agreement and whether the parties actually reached an agreement at all.
As such, all parties are often better served through a detailed agreement that describes each person’s obligations and, most importantly, what will happen when should the other person not perform. Much in the same way that a pre-nuptial agreement defines the disposition of assets when a marriage ends, a joint venture agreement can limit expensive and time-consuming litigation about the parties’ agreement and who should get what share of the business or real estate. As such, the parties should consult a knowledgeable attorney in advance to ensure that everyone is on the same page about what actually happened during “the talk.” If you have any questions about business law, contact us today!
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