Going into a business partnership is very much like getting married; you're going to share finances, bank accounts and sign documents that legally bind you to each other. And unless you are smart, and proactive, getting out of a business partnership can be tricky, lengthy and costly.
Getting out of a business partnership can be hard
As with any relationship there are times when you will get along and times when you won't. It is during the times when you aren't getting along that you need to prepare for. Just like with a prenup in marriage, it is best to agree to the rules of engagement when things are "going well" vs when they aren't. Otherwise the proceedings can stall, require lawyers to get involved and essentially cost you money. Without the proper documentation outlining the agreed terms for disengaging, termination and so on, you run the risk of losing your company entirely simply by having your hands tied and and your money being spent fighting with your partner(s).
Prepare yourself in advance with documentation stating agreed terms of dissolution
Many partnerships start out as 50/50 with each partner having equal shares in the company, thus equal input and rewards. However, this isn't always how the company is run; often one person does significantly more than the other(s). A 50/50 split doesn't give the person working harder any extra decision making, compensation or ownership of the company.
Toxic biz partnerships can run your company into the ground
Further, if you both own 50/50 shares in a company, you can't just tell your business partner to leave if it's no longer working out. Why? They own 50% of the company. Unless there is an Employment Agreement that outlines their duties and performance expectations as an employee (not a shareholder) they can actually stop showing up to work and/or stop working all together and still be entitled to their salary and their share of the profits. Simply because a piece of paper says they own 50% of the company.
I've heard very sad stories of business partners behaving in horrifying ways. One company in the US has a two person partnership where the relationship was so volatile the partners stopped communicating. They each want the other partner to leave, and are trying to force the other out, but neither will agree to the financial and buyout terms proposed.
Let me be very clear: this can ruin your company and run it into the ground. This is a toxic situation.Spending all your time fighting with your business partner takes your eye of growing and building the company. Trust me, it can be devastating.
If this company had prior safeguards in place they could easily resolve this situation and be done with it. Because they don't, they are both stuck in a toxic, and emotionally and financially draining situation.
Prepare these documents in advance; when emotions aren't running high
The good news is that you can protect yourself. But it requires forethought, something often difficult to have when starting a business. Much like a relationship, you can't imagine the partnership going sour. But just like a prenup, this is the exact time to prepare for the future when you are both on good terms and can have this conversation rationally and without any emotional baggage.
1) Invest in a Shareholder Agreement:
At the beginning of your relationship/incorporation hire a lawyer to develop a Shareholder Agreement (SA). The Shareholder Agreement will have a lot of stuff in it that you may not understand or care about, but the key component of the SA (other than outlining the share structure and such) is that it contains the mechanisms by which you can dissolve the business partnership. Since you both sign the SA you both agree to use these mechanisms when things go sour. It essentially gives you a way out, either by buying the partner out or by having them buy you out. Without a Shareholder Agreement there is no efficient way to end the partnership, force your partner out, get a buyout yourself since you can quite literally be in a standoff for years and years. Think of the financial, and emotional, toll this will take on you while it lingers in limbo.
Mechanisms for dissolving the partnership include such features as the Shotgun Agreement. If you find yourself at opposite ends during buyout / dissolution negotiations the shotgun lets one partner make a financial buyout offer to the other. The other partner then has 10 days to accept it or reject it. By rejecting it, the partner that triggered the shotgun is forced to take the offer and leave. The important part of this mechanism is that you can resolve your dispute in 10 days. And by forcing the offering partner to take the deal, it ensures the buyout off is financially fair.
The Shotgun specifically is an efficient way to end an acrimonious relationship. With the Shotgun there is no negotiating. The financial offer is made, 10 days is given to accept or reject and at the end of 10 days it's done. This is why you need a Shareholder Agreement - to give you the mechanisms by which you, or your partner, can dissolve the partnership.
Remember, the Shareholder Agreement is a legally binding document that you have both agreed to and signed. That means that you can engage one of the vehicles in it for dissolution and your business partner must agree with it. You are both bound by the terms outlined, therefore when things go sour, you follow the direction in the Shareholder Agreement for resolution.
2) Employment Agreement
A Shareholder Agreement outlines the terms of the shares in the corporation and allows for mechanisms to dissolve the partnership. What it doesn't cover are the tasks and expectations of each partner's role in the business. This is actually very important; without an Employment Agreement your business partner can essentially show up to work each day (or not), do absolutely nothing, and still expect 50%/their share of the profits, their salary and so on. Just because your partner isn't pulling their weight doesn't mean you can fire them or stop paying them. You need the accompanying Employment Agreement that outlines their responsibilities to have any recourse. Just like with an employee; you have to prove they didn't live up to their agreed to tasks in order to fire them. The Employment Agreement ensures that if your partner stops showing up, doesn't do their assigned role/tasks, you can essentially stop paying them their compensation, benefits, profits etc. Which is helpful to save money while you deploy a mechanism in the Shareholder Agreement to get rid of them.
Adding the Employment Agreement document is critical. That way should your partner fail to do their tasks at the company, you have reason to withhold their salary, bonus and so on. Without it, you have no recourse. They can simply be there and get paid by virtue of being a Shareholder holder.
These two documents are critical to set up early in the business life cycle, particularly when you are both getting along and can agree to the documents objectively. Without them, you can be stuck in a toxic business relationship for a long time with no way out.
Be smart, plan ahead and prepare for the worst. So that when it happens, you can end it quickly.
Ed note: I am not a lawyer, and the above comments are based on my experience in business. A lawyer can better define the purpose and legalities of these documents and ways to protect yourself in business.Please seek legal advice.