When you enter into a business relationship, there’s always a chance things won’t work out, and when that happens, there are usually few good options. But there are steps you can take to minimize that possibility. First, let’s look at an example of inadequate planning that contributed to a business relationship going bad.
Our client had created a limited liability company with a single partner for the purpose of developing commercial real estate. After our client purchased a building, he transferring it to the LLC, and he and his partner began to demolish the interior.
Not long afterwards, problems began when our client’s partner failed to uphold his obligations. It became clear the two individuals had to go their separate ways. After the partner rejected a buy-out, our firm filed suit to dissolve the LLC and regain title to the building. The court granted the dissolution and awarded the building to our client.
Our client was fortunate to obtain the building, as the judge could have ordered that it be sold and the proceeds distributed to the partners. Apparently, the judge recognized that our client had transferred the building to the LLC and was entitled to a significant return on his contribution.
What are the takeaways? There are several. First, before getting into a business relationship with someone, be sure to vet that person. As one of our lawyers says, getting into a business relationship is a lot like getting married; before you commit yourself, you have to date that person and get to know him.
Second, be sure you have an operating agreement that covers the basics and provides for the future. The operating agreement for our client’s LLC did not designate a managing member, and it was likely created with little thought—after the enterprise began. The provisions concerning capital contributions were inconsistent, and there was no guidance for handling a dispute between the partners. Worse yet, there was no language in the agreement that protected our client’s significant investment in the LLC.
In short, don’t cheat on the amount of time it takes to get to know your partner, and be sure to have an operating agreement that is clear about each partner’s rights and responsibilities and what happens when the relationship goes sour.