When a couple that is in love decides to get married, no one wants to think about how it might end in divorce but to protect their assets, sometimes a pre-nuptial agreement is necessary. No one should avoid making major business moves while they are in the honeymoon phase because the future is ultimately unpredictable—this is just as true for business partnerships as it is for traditional marriages.

It might be tempting to fall into the trap of presuming nothing will go wrong and that business partners will never disagree, but this is simply unrealistic. Due to the unpredictable nature of the future, it is necessary to establish organizational documents and governance that define the procedure in the event that owners cannot come to an agreement.

Benefits of Establishing Organizational Documents Early On

It is far more valuable for the interested parties to define these terms for disagreement at the beginning while their relationship is strongest and will yield a process that is the most beneficial for the business. Waiting until after there is a dispute to try to organize a response will undoubtedly be more difficult and will make it impossible to create an impartial procedure for moving forward. Setting expectations early on in the business partnership will help reduce harmful disruptions to the business.

Performing a deep examination of whether a business partner is the right fit at the outset of the partnership is essential. Confirming that partners share a similar approach to doing business can save a lot of time in the long run and may reveal an essential incompatibility that prevents a pair from ever entering into a problematic partnership. Partners need to align their business strategies in their initial governance documents in order to determine whether they should even do business together.

What Should Be Included in Governance Documents

Some issues that arise between business partners cannot be fixed later, or if they can be fixed it becomes prohibitively more difficult than it needed to be if they had just established initial governing documents. Some issues may seem obvious, while others may seem too small to warrant consideration, but they both can have significant impacts if partners fail to give them the proper consideration. The following factors are just a few that deserve to be considered in governing documents in order to reduce costly and unnecessary business disruptions:

  1. Money—Anything concerning ownership percentages and responsibility for funding should be explicitly established in the initial governing documents. This should be updated in the event of any increase to a partner’s ownership percentage upon contributing additional capital that may be necessary as the company grows.
  2. Management Responsibilities—How much—or how little—control a partner has in business operations should be outlined in detail. Without guidelines, it is easy to presume that contributing money or ownership percentages directly translates to business decision-making power, but this does not always translate in industries where specialized expertise is needed to make those decisions. If partners retain an active role in decision-making, it should be determined which partner has the final say in the event of a disagreement if there is not an odd number of partners or uneven voting power. For example, one partner may take on more of a benefactor role and contribute more money, while the other partner invests more time and expertise.
  3. Meeting Procedures—Overlooking how to govern company meetings can be detrimental to business, especially if a hostile business partner is able to exploit poorly established meeting procedures to prevent companies from ever holding an official meeting. It is easy to overlook the minutia of defining who has the power to call a meeting, the number of partners required for a quorum, or the means of providing notice when a meeting is called for (mail, letter, e-mail, or phone).

In the absence of a formalized agreement at the outset of a business marriage, partners are simply setting themselves up for failure. It is almost always less costly, less frustrating, and less time-consuming to agree to these details at the beginning of a business venture.

-Matthew Bone