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Ethical Obligations of a Partner
This issue's special report focuses on growing your business. A common stage in growing a business is taking on a partner. The word "partner" here is not used in the technical legal sense, but is used generically to refer to anyone going into business with you as a co-owner, whether the business is a partnership, corporation, whatever. Partners are sought for skills, marketing contacts, money or a combination of these. Often the addition of a partner is an essential step in growing a business. It is also a dangerous step and one fraught with ethical questions, too many questions to be addressed in one column. Thus it is only fitting that those questions be addressed in these next two issues of "Ethically Speaking".
In my legal practice I have often seen businesses destroyed by disputes among partners. At the very least, a lawsuit among partners is temporarily disabling to a business. I'd venture to say that in most cases such litigation causes sufficient stress as to be life-shortening or induce illness. And believe me, disputes will occur.
Okay, so you have a partner. If you want it to work you must both know what the deal is. Not a simple question, that one. Just what does one partner owe another? Is this partnership one between equals or between a silent money partner and a working partner? The rules are different for those two situations.
In the case of a partnership between a supplier of ideas, management and labor on one hand - and a supplier of capital on the other - specific ethical obligations arise. The working partner owes the money partner two things: an appreciative attitude and slave labor. As to attitude, it has been my experience that the partner doing the work day after day often comes to resent the portion taken by the mere investor. The working partner should never forget that this investor is enabling her to pursue her dream. This the investor does willingly, though almost every other investment is safer and literally every other investment is less hassle. For doing this the supplier of capital demands, and deserves, a substantial return on her investment.
Does the supplier of capital owe his partner more than just money? Absolutely! Frequently the money partner has substantial rights to make changes if certain business goals are not met. The ethical partner does not wait for failure and swoop down in a surprise takeover. The money partner owes both his partner and the business a duty of regular surveillance. Often the entrepreneur is a salesman, an inventor, a dreamer. The silent investor of capital should have a constant eye on balance sheets, income statements and operating ratios - for the benefit of all concerned, including himself. When something needs attention, he should demand that attention be given. The entrepreneur's trail is often a lonely one. By being there to listen, the silent partner provides real value to the business beyond money. That said, a silent partner is obligated to remain silent as to the daily operations of the business. That was the deal, and it should be honored unless both partners willingly agree to change the rules. A look at major league sports is instructive. The owners of successful franchises set the budgets but don't call the plays.
When there are two or more working partners the handling of money becomes a tougher issue. Only by discussing money issues at the formation of the partnership, and periodically thereafter, can serious disputes be avoided. Those disputes are centered on spending issues and debt. What can one partner do without obtaining the consent of the others. Can she buy a file cabinet? How about a car? If the answer is yes, are we talking Geo or Lexus? What about hiring an additional employee? How much debt can a partner accrue without consulting the others? Can she buy a new printer cartridge on account? How about a new computer? What if she signs a new office lease? At the outset of the relationship these issues should be discussed at great length. It is impossible to anticipate all situations in a set of written rules, so understanding and trust among the partners is essential.
Having set out the examples above, all partners must realize that on occasion a decision will need to be made on a major issue when one or more partners may not be available. When this occurs, the partner making the decision has an ethical obligation not to make a choice he knows his partner would strongly oppose. If possible, stall. Generally preserving peace in a partnership is worth the cost of postponing a major decision or buying an option.
Ben Franklin said it concisely, "Time is money." In a partnership among working partners, as opposed to the relationship between a silent money partner and a working partner, time is the major battlefield. In a young business, or any business with entrepreneurial spirit, partners are expected to devote most, almost all, of their lives to the business's success. In last month's column the phrase "slave labor" was used. If working partners don't own each other in a reciprocal fashion, they at least have strong ethical claims on each other's time.
At the outset of a business relationship, the prospective partners should discuss their philosophies of life to assure reasonable compatibility. If one of two partners works a forty hour week, while the other works sixty - there will be resentment. I do not advocate a lifestyle where a business is everything. I do advocate partnerships where the partners roughly balance in their views as to how time should be spent. If one partner leaves work early four days a week, to participate in kids' after school activities, the other partners, who work late, will grow resentful. This is but one example. Discuss these issues thoroughly and openly before becoming partners, and if you're not compatible - don't get married!
In a startup company, one or more partners may need to work part time somewhere else just to eat. How involved can a partner be in another business? It goes without saying that a partner cannot compete with his partners. But how about unrelated business ventures? If the partnership operates a grocery chain, can one partner also own an art gallery? How much time is he allowed to spend on business ventures not involving his partners? What if he paints as a hobby? No problem, you say. What if his paintings start to sell? Imagine: your partner's first one man show was scheduled for tomorrow six months ago with invitations sent out to everyone. Your major customer calls, and tells you he's flying in tomorrow to discuss some major problems in the area of your company that your partner manages. Where is he going to be? Who owes what ethical obligation to whom? This is life. These things happen. These things kill companies.
Assuming you and your partners have worked through every possibility hinted at in these last two columns, you will still have disputes. Even if you and your partner agree on everything and continue to do so forever, are you sure you'll always agree with your partner's son-in-law, the one his daughter hasn't met yet? Everything's always been fifty/fifty. Well, how will you divide the money if one of you is hit by a truck and unable to work for nine months? Remember, the business will have to hire and pay replacements during that period. Even in the most perfect situation, your partner is still not immortal.
The only way to circumvent protracted litigation when a major crisis among partners hits, is to have decided upon the results in advance. You owe it to your partners and yourself to invest the time and money it takes to do a good prenuptial agreement. In business these are referred to as partnership agreements, shareholder agreements, or more loosely "buy/sell's". Spend some time and money with an experienced lawyer doing this. It's far less expensive than litigation (though not as much fun for your lawyer).
A good agreement attempts to address the four D's: death, disability, disagreement, and divorce. Death and disability can usually be handled with insurance. As soon as you can afford it, buy it. Texas is a community property state, so divorce can greatly affect a business. There is not a perfect solution for this, but it should be addressed as well as possible.
The odds are great that sooner or later you will have a disagreement. If nothing else, one partner will want to retire when the other is not ready. This can and should be provided for specifically in a written agreement. (It's too easy to forget over the years, so write it down.) And there's always the possibility of disagreement of the "This town ain't big enough for the both of us" sort. This too can be handled in an agreement, if that agreement is prepared before the disagreement becomes reality.
These last two columns were intended only to start you thinking about the ethical aspects of partnerships, and perhaps offer some advice on how to avoid problems. But there will always be problems between partners that no one could anticipate in advance. So I'll close with the rule of thumb taken from the ultimate source of wisdom. Love thy partner as thyself.
© 1996 Daniel A. Krohn, published in DBA Houston
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