Set Your Business Up Right and Avoid Bitter “Business Divorce” Down the Road

Chris Hanslik

February 9, 2011

As an entrepreneur, you believe your new business venture will succeed.  Why wouldn’t you?  You and your business partners have an idea for a product or service that the public wants and needs.  Hours of careful deliberation have gone into the business plan and personal finances are the source of your initial capital.

During a business start up, funds are often limited and it’s common for founders to avoid unnecessary expenses until the business is up and running.  Don’t, however, neglect the need for solid corporate formation documents when you start your business. Small- to mid-sized companies often fail to fully consider the implications of proper documentation on the affairs of the company and the potential problems that can arise down the road should animosity develop between the owners.

When owners cannot agree on the direction of the business it can lead to what some call a “Business Divorce” – which is essentially a “break up” of business partners.

Business Divorces come in all shapes and sizes and for countless reasons.  The one universal truth is, that if not handled properly, the business itself can be the victim of the fight – and fighting among owners can put a drain on the company’s resources and distract from running the business. The good news is that most Business Divorces can be avoided by following these tips:

• Execute the proper formation documents at the beginning of the venture to include: By-Laws, Shareholder Agreement, Company Agreement, Employment Agreement, etc.
• Document each partner’s expectations related to owning and operating the business in the formation documents to include job titles and descriptions as well as compensation
• Ensure the formation documents contain an easy to follow Buy-Sell provision
• Ensure the formation documents contain an easy to follow “dead-lock” provision so that the business is not unnecessarily interrupted because the owners cannot agree on something
• Ensure that any owner compensation changes are done on a proportionate basis
• Don’t terminate an owner who is also an employee unless good cause exists

It’s important to remember that without these safeguards, when a dispute occurs the time and money spent fighting over who is entitled to what usually destroys the very thing the parties are fighting over – the company.  With prudent planning on the front-end, a framework can be established to allow for a peaceful separation if needed.