Wednesday, August 17, 2011

The Best Way To Fix A Struggling Business Relationship

When is it safe to settle on a verbal agreement, and when it is smart to hire an attorney so nothing gets left to debate should things turn awry?

FIX A STRAINED BUSINESS PARTNERSHIP NOW

First, understand the legal and tax implications of teaming up. Then discuss problems and goals and get an attorney to help put a partnership agreement in writing, experts say

By Karen E. Klein

I’m a principal at a startup ad agency, working as creative lead and director of business development. My partner originally agreed—though not in writing—that I would get a 10 percent commission for finding clients. Now that I’m doing the work, he’s suddenly concerned that my commission isn’t fair because I’m a partner at the agency. His logic is that you’re either a sales rep on commission or a partner who earns a salary. He wants an even division of monies, even though he’s not doing an even division of the work. How can we resolve this fairly? —J.M.D., New York

Your question raises serious issues about the viability of your partnership, even before you’ve gotten your business off the ground.

The most fundamental misstep is failing to put your partnership agreement in writing. “Even if it’s on a napkin, writing something down focuses attention on issues that must be discussed and crystallizes the relationship,” says Los Angeles business lawyer C. Dickinson Hill. “Perfect foresight is rare, but everybody should recognize the need to address compensation issues upfront. If the partnership is to last, you should be able to discuss issues as they arise and each should be willing to do what is needed to keep the other partner involved. If not, perhaps this is not a good fit.”

A second problem highlighted by your question is a misunderstanding as to how partnerships function legally and for tax purposes. For instance, business partners do not earn salaries as employees do. Salaries reduce profits and are deductible by the partnership. Partners share in the profits—and losses—of the business. If the partners need monthly income, they may take “draws” as advances on their yearend share of profits.