Loosey-Goosey Business Arrangements Will Bite You Every Time

Elena Volkova, Esq. on November 17, 2015

In this final article on how to create joint ventures, I am going to touch upon the most undesirable way to structure a business relationship – unincorporated general partnership.

A general partnership can be formed (in writing or accidentally) when two or more individuals or entities come together to conduct business and spread the costs, profits and losses of the co-venture.

Without a partnership agreement or corporate form, a general partnership may be created by implication if two parties are working together to share profits and losses.

The only advantage of a general business partnership is that it is flexible. The partners are not required to put anything in writing, and they owe each other a fiduciary duty. Meaning: they have to put the interests of the partnership above their own, and they can’t usurp business opportunities form their partners.

The main disadvantages are no liability protection for general partners and almost inevitable likelihood for partner disputes.

If a joint venture proceeds without a written agreement, a general partnership may be implied by the court. The result is: the risks, and profits and losses are shared among the parties equally. Everyone is responsible for the debts and liabilities of the joint venture. There is no protection against personal liability.

Joint venture without a written agreement also creates a deadlock around the terms of exit, management or succession rights of partners to joint venture. It does not allow to protect the trade secrets, intellectual property or disparity in the sizes and relative power of the parties.

Here is the checklist for businesses considering partnering:

Do

  • Determine the length of the venture and whether the parties will seek to associate via entity or contractual form;
  • Properly choose which form of entity structure (by considering the nature of the venture, the economic positions, relative knowledge, citizenship and size of the parties, how the venture will be managed, the duration of the venture);
  • How the venture will be financed and the relative responsibilities of the parties to make additional contributions;
  • Determine how profits, losses of venture will be distributed among the parties;
  • How the venture will be managed and how the management of the venture will correspond with the management of each of the parties (how will the parties communicate with each other as well as the venture management) and the responsibilities and scope of liability for the management of the venture;
  • Determine how the parties will terminate or leave the venture, including public offerings, successions and transfers of interests (e.g., family transfers, rights of first offer, rights of first refusal, tag-along and drag-along rights);
  • Determine how parties will behave in the event of a failure of the parties to honor their obligations or failure of the entity (e.g., insolvency, bankruptcy, etc.);
  • Determine how disagreements and voting of the parties will be resolved;
  • Work out how intellectual property and confidentiality will be determined;
  • Enact memorandum of understanding and terms of the JV;
  • Determine how the JV and the parties will be taxed and ensure compliance with tax laws and regulations; and
  • Determine how regulatory issues and compliance with the law will be ensured.

Don’t

  • Ignore issues surrounding disparity between the economic power of the parties;
  • Minimize differences between the parties’ cultures, expectations and management styles;
  • Ignore regulatory hurdles and compliance issues to ensure that the JV operates legally;
  • Fail to work out how and at what points the parties will share risk, technical knowledge, trade secrets or client lists;
  • Fail to work out an exit strategy that meets the needs of all parties to the venture;
  • Fail to work out how intellectual property will be protected and nondisclosure issues;
  • Fail to work out whether the parties will be allowed to pursue separate or competing business opportunities; and
  • Ignore how the parties will communicate with each other and the venture and handle disputes over management of the venture.

This material may be viewed as attorney advertising and does not constitute legal advice. This information does not create an attorney-client relationship between you and the author. This article strictly represents the personal views of the author on the date it was written and such views are subject to change without notice.

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