IS MY UTAH BUSINESS PARTNERSHIP IN TROUBLE?

Utah business partners: are you in trouble? Seen here mountain biking on Antelope Island, Utah

Short answer: probably. It all depends on what you mean by ‘trouble.’ Do you mean, “is my Utah business partnership about to implode (or explode!)?” If you are asking yourself that question, you probably already know the answer. Get Utah legal help IMMEDIATELY. If you mean, “are there issues with my Utah business partnership that need to be handled before they turn into legal troubles?”, then you should seek Utah legal help at your soonest convenience. Let’s go through some of the issues that you might not have thought about that could easily turn your amicable Utah business partnership into a sinking Titanic of costly litigation:

Is Your Utah Business Partnership in Writing?

I don’t care if you are going into business with your grandma, grandpa, best friend, spouse, domestic partner, son, daughter, granddaughter, god-son, priest, bishop, or your most trusted yogi, it needs to be in writing. Something. Anything. Well, almost. There is a hierarchy of writings that are most useful in proving the terms of your Utah business partnership. Whatever you do, don’t leave it unwritten. A number of various writings can co-exist and contribute to the landscape of your business relationship. Some writings get cancelled out by others but can be useful to fill in blanks when your written agreement is silent on a particular issue. Briefly, here are some writings that could be used or helpful:

Partnership Agreement: A partnership agreement should set forth the core terms of your Utah business relationship. It should include things like who is in charge, who has authority to bind the business, how much of the business you both own, how tax-related issues are handled (profits and losses), and how you can get out of the relationship. These are all complicated issues and you really, really should get legal help to navigate them.

Operating Agreement: Even if you have a partnership agreement, your Utah business should be incorporated formally as a limited liability company (LLC) or a C or S corporation (Inc). Those business entities are governed by legal documents that tell the owners how the business will be run or managed and should be in harmony with a partnership agreement (if it exists). No two operating agreements will be the same. They are as unique as your business. You can find form operating agreements on the Internet but you really should get legal help to get it right. A bad operating agreement is a recipe for juicy (i.e., $$$$) litigation. Get it right on the front end and you will likely avoid an expensive legal fight on the back end.

Emails: If you do not have a formal written and signed partnership or operating agreement, you should at least have emails. When you are discussing and negotiating your newest business venture, send emails as part of your negotiations and discussions. Whenever you have a conversation that you believe concludes in an agreement of any kind, send out a brief email recapping what your understanding is about the terms agreed to. It doesn’t need to be long or formal, just a simple “hey, thanks for talking today. Just so we’re clear I agreed to __ and you agreed to __ … blah, blah, blah. Thanks!” If the receiving party does not respond, then later on they will likely be held to the terms you stated by their silence even if they later claim your email was inaccurate. Note that this may not hold true if your actions are inconsistent with your email or there are other writings inconsistent with it. The point is, write something down and send it to your would-be business partner.

Electronic notes that can be dated to when you took them: There are apps or programs that can be verified to a certain date. It’s a long-shot and if you are getting down to this kind of verified writing, it means you are likely already in litigation or are anticipating it. I would not rely on anything so difficult to verify as a memorialization of your agreement but it could be used. Just know that if this is what you are relying on, you will likely need an expert to authenticate your notes were created when you said they were. That means $$$$. Experts are never cheap.

Notes on paper: Old school. Unless you and your business partner actually sign the paper notes as reflecting your Utah business relationship, these kinds of notes are notoriously unreliable and difficult to prove as authentic. I’ve used handwriting experts and ink experts to attempt to prove the authenticity of handwritten notes and that the notes were made when the partner said they were made. It’s not easy, it’s not cheap, and there is no guarantee a judge or jury will believe you and your expert. So, don’t rely on your napkin notes to save the day as to what you and your business partner decided. Just don’t.

Text messages: SMS messages or text messages are convenient but they don’t always stick around long enough to be useful. People change phones, fail to have a system for backing up text messages, or delete their messages before they get saved anywhere. I would not rely on text messages as the writing you will be relying on.

Other electronic messages: Unless you have a reliable way to preserve your electronic messages, they will not be useful when you need them. Also, you will need to prove that the message was sent and received. Email is ubiquitous and often fairly self-proving at this point. That’s why it makes a good writing platform for proving the existence of an agreement. Whatever random electronic message app or system you use needs to be reliable and provable later on.

By establishing a firm, written legal foundation, you can avoid a nasty host of legal problems.

Being a Utah Business Partner

In Utah, business partners are often held to owe the other general partner a fiduciary duty. These are high-quality, high-integrity duties that can form the basis of righteous claims that could lead to general damages, actual damages, and (potentially) punitive damages. These are the kind of damages that make the news. They include duties of loyalty and disclosure. Don’t let yourself become a business partner on accident or unnecessarily. Be intentional. If you are going to be a partner and be held to these kinds of duties, make sure you go into it with both eyes open.

While there may be advantages to having a partner, such as splitting capital investments and having someone to shoulder half of the burden and responsibility, partners are not necessary, warranted, or wanted in every situation. Think about what you want a partner for. For example, if you are looking for a certain skillset, you can often hire it via an employee, leased service, or independent contractor. By not taking on a partner but hiring the needed skillset, you get to keep the equity and control over your business. You don’t sign up for the difficulties. Make sure you really want to be a long-term business partner with the person you are dealing with or at least make sure that your proposed business partner’s contribution is worth the trouble.

Utah Business Partners Share Capital and/or Contributions

You should expect your business partner to contribute capital to the business. This will come either in a ‘sweat equity’ way (i.e., providing work for the business) or through cash. You should have some idea if your proposed business partner has the means to provide either or both. If a person has a full-time job and no cash, when will they provide the ‘sweat equity’? If the company needs more money later, can you or your partner come up with the extra cash? If not, how are you going to do it? What about taking on more partners? Or, who is going to take out that home equity loan to fund the venture? In the absence of a formal agreement, capital and equity divides or requirements may not be equal or understood. Relying on a vague hope that your Utah business partner will act in a manner most beneficial to the company is a pipe dream. Don’t smoke it. Spell it all out in advance. Do your research on your proposed business partner. Make sure you get it all in writing  how expenses and equity are divided. This includes the sharing of business losses when tax time rolls around.

Your Utah Business Venture Should Designate How Liability Is Shared — or Not Shared

You can designate from the outset the liability, participation, and/or duties of the partners. If you just want someone to fund your venture, you can potentially find a ‘silent partner’, i.e., someone who prefers to be a limited partner– limited in terms of liability, contribution, participation, and upside. It’s all up to you. Be creative. If you can find a partner to agree, you can make it happen.

What is your Utah Business Partnership Exit Strategy?

One of the most important parts of planning your partnership is planning how it will end– because it will end. You will not live forever. Don’t kid yourself. Also, if everything goes well or better than expected, you will want to sell what you created at top dollar. At that time you will be grateful that you thought about the end from the beginning. Even if things go as poorly as it possibly could (think real estate crash in 2008), you will still likely have an asset that needs to be liquidated. You will want to know who stands first in line to collect the pennies-on-the-dollar debts the business owes to creditors and equity-holders (you). Also, what about when you or your partner wants to leave the business and move to Montreal, open another business, becomes disabled, retires, or wants to buy you out of the venture? Plan for it. Your operating agreement or partnership agreement should spell out these potentialities or at least provide a framework for how to resolve them.

Will You or Your Utah Business Partner Be Bound by a Non-Compete Agreement?

You need to know that many states, including California, will not honor non-compete agreements or will at least restrict them substantially. Utah has similar restrictions. I have addressed this previously. There are exceptions in Utah that can be applied but you need to do this judiciously and carefully. Make sure that your Utah venture justifies the restrictions. Also, you can use confidentiality agreements, non-disclosure agreements, and other restrictions to help keep potential rogue partners in line.

Who Will You Use to Help You Write Your Utah Business Partnership Agreement?

As you can see, business partnerships are complex agreements. A good one will help keep you friends with your business partner. A bad one could make you lifetime enemies. When you hire me or any attorney to help you set up your partnership, you need to know that your attorney will either represent the new business or one of the partners but should not represent all parties to the agreement. This is a bit off-topic and warrants volumes of analysis but think about it: if your attorney represents you and your proposed business partner, who is negotiating with whom and whose side is pursued? It may be that you both want exactly the same thing– that would be fantastic– but don’t expect your attorney to represent you and your partner at the same time. If your business fails and one of the terms in the partnership agreement favors one of you to the detriment of the other, your first thought will be that your attorney took sides to your detriment. That’s how a legal malpractice claim is born. Of course your attorney could ask you to both waive any conflict but then you are stuck getting water-down opinions from an attorney who is not necessarily looking out for your best interest.

My recommendation is that you do one of two things: 1) neither partner hires an attorney but you jointly hire an attorney for the new company to write the new company’s operating agreement based on both partners’ agreed-upon input, or 2) both partners independently hire different attorneys to represent them in the partnership. Which to choose generally comes down to how much is at stake: if there are big bucks being invested, get your own attorney; if you are pinching pennies to get your venture off the ground, jointly hire an attorney knowing that you are getting a watered-down version of the legal advice you may otherwise get. This can get sticky quickly but if you can generally agree on things, you can probably choose the first option.

Whatever you do, get a competent, experienced attorney (like me) to help you get your Utah business partnership in writing.

Call Me. The above discussion probably raises as many questions as it answers. You likely have more questions than this post or the other information on this website can provide. I regularly represent Utah business partners in a variety of business and partnership-related contexts. You cannot make a good decision if you do not get competent advice from a qualified, experienced attorney. You need to protect yourself and your interests. You do this by pursuing what you are entitled to. Call me or contact me directly. Using my many years of experience and backed by a firm of legal specialists in many legal fields, I can help you evaluate your case and help you make smart decisions.

Ken

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