Because you are forming a partnership with a relative, it is important that you draft clear Operating and Partnership Agreements. You must define the division of ownership and how big decisions are made. Furthermore, I recommend you draft an agreement defining compensation and distribution of profits.

But He’s My Brother

Then it is even more important to define the business relationship. When people go into business with a relative, unless things are clearly defined, there is an assumption that the partners are equal. And that may have been the original intent, but as the business grows, one partner will assume a greater responsibility for the work. This invariably leads to disagreement over the percentages of ownership.  I’ve worked on a number of cases where one partner wanted to adjust the ownership distribution based on workload. That invariably leads to tension.

The closer two people are related, the more difficult this gets. When brothers start a business, they will move ahead as equal partners.  Two people never have the exact same skill sets. They have different work drive. And most important of all, over time they develop different visions. When partners have different visions for a business, friction increases. Then comes the disagreement over who “really owns” a controlling interest. People tell me things like, “I just always felt that his share was a little less than mine.” Guess what? “Always felt” isn’t a legal term.

This gets even worse when a parent takes a child into a business as a partner. The younger often wants to bring change that the parent partner doesn’t support. Because of the parent-child relationship, tension rises but nobody wants to deal with it. These are the hardest cases for me. The parent brings in his son hoping to teach him the ropes. The son wants to take the business in a new direction. The parent always feels superior and the son assumes equality in ownership. Without the proper agreements, tempers flare. Once the parties stop talking, the business suffers.

When parents bring an adult child into the business, they assume that they are in charge. The son or daughter coming into the business assumes they have an equal stake. This can immediately lead to conflict as soon as the son or daughter wants to make an important decision. It’s best to draft the documents that define ownership, management roles, compensation, and distribution of profits. That way there are no assumptions that can lead to a fracture of the relationships.

What Documents?

To avoid tainting a family relationship, it is very important to create and sign Operating and Partnership Agreement. No, you need not incorporate and issue stock though you certainly can if that makes tax sense. We need to include these key provisions:

• Who is the managing partner?
• How are decisions made? (Vote? Managing partner decides? Cost over $10,000 require full agreement?)
• How often do partners have formal meetings? This helps correct most tension.
• How is the ownership divided?
• Is there a vesting schedule? (Junior can start out with 10% of the company and be granted additional ownership over time)
• Who does what job?
• How are partners paid?
• How are profits Distributed?
• If a partner decides to leave the business, how is that handled?
• What happens in event of death of a partner? Disability?
• What happens if a partner abandons the business?
• How is the business valued in the event of need to satisfy a buyout?

These are just the key points. An attorney who specializes in business matters can draft documents with the proper provisions and under the compliance of your State.

Protect Family Relationships

The goal in all this is two-fold. We want all parties in the partnership to have clear understandings of ownership and roles. And, we want to protect the family relationships from fracturing. It’s very sad when brothers fight brothers or dads fight sons and daughters. Problems can be avoided.

Finally, when one partner is much older, it’s important to have some plans for when the younger partner becomes the managing partner. Many disputes in family businesses come from a younger partner wanting to run the show after being second-in-command for many years. That doesn’t mean someone has to retire, but the senior partner should groom the junior partner to assume the role while the older is still working.

Let me say it one more time.

If you are in a family business, it is especially important that you create and sign (I see lots of drafted agreement that were never signed!) Operating and Partnership Agreements. Don’t risk a total breakdown of the relationships over business. That rift can happen after 20 years of working together!

Chris Reich, TeachU