Archive for October, 2011

Small Business Partnership Dilemmas

Saturday, October 8th, 2011

In this day in age, people become involved with small businesses for different reasons. One person may be involved with a company is because he or she invested financially with this business. This person is known as a cash partner. On the other hand, someone may be involved with a small business because he or she provides a service of some sort to the business. A person who does this is called a service partner.

As with all business partnerships, glitches can occur. Someone who is a cash partner in a small business faces multiple risks. Each of these partners brings something to the table, or it wouldn’t be a partnership. The cash partner puts money into the business with the attempt to earn interest. The service partner brings a skill to the table and promises to use these skills or services in order to further the business. They form the company and specify their interests in the business’s legal documentation.

Problems arise if the service partner cannot follow through with his end of the deal for any reason. The cash partner does not have a plethora of options when this happens. He can 1) disperse the small business or 2) hire someone else to provide services. If the cash partner disbands the business, he ends up splitting whatever money is left with the service partner according to the terms set up in the beginning, but this leaves him possibly losing a substantial amount of money.

The second option is hiring another person to take over what the service partner was doing. This also creates more expenses, and it does not guarantee that the business will take off under this new employee. Under option two, the service partner still holds stock in the company even though he is not earning it. When looking at these two options, neither one jumps out as appealing. There are preventative measures that a cash partner can take to protect himself.

One way to do so is to insist that the service partner takes a vesting interest in the small business. This ensures that the service partner will continue to work or have a specified interest in the business after the completion of specific services or events.

These will need to be spelled out in the legal documents. In this case, the cash partner is the sole owner. This may sound unappealing to the service partner because he is supplying a skill so in most cases he would want to run it how he sees fit. There are disadvantages to vesting interest partnerships as well. The legal defining documents may not leave room to cover all situations, which poses a problem.

In this day in age you need an individual you can count on, and at the Law Offices of Thomas D. Reino you get what you see. For more information on business law, or to get business law legal council please contact us by either phone at 817.303.2133, or by fax at 972.264.0891.