When engaging in business transactions with friends, it can be very tempting to try to save the time and money involved with formalizing the arrangement. Everyone knows that lawyers are expensive. You know and trust the person you're dealing with, so why not just trust them to keep their word now? Maybe you’re worried that making a friend sign a written agreement will make them think you don't trust them. Who really wants to talk about how a deal could go wrong when you and your partner are so pumped about your great business idea? I would suggest having this conversation early is much better than skipping it and having the deal go south after you've both invested time and money. Despite your excitement about your new venture, things can, and often do, go wrong and you need a plan in place for that possibility.
Is this a one-time transaction or a long-term business?
If you're dealing with a long-term business with this person, you may have just formed a partnership, whether you intended to or not. Partnerships in Maine are formed by “the association of 2 or more persons to carry on as co-owners a business for profit . . . whether or not the persons intend to form a partnership.” 31 M.R.S.A. § 1022(1). Partnerships in Maine are generally governed by a partnership agreement. However, when there is no formal written agreement and a variety of issues are not addressed, Maine's Uniform Partnership Act (UPA) will control.
Alternatively, if you are dealing with a short-term arrangement that is not an ongoing business, any disputes will be controlled by Maine contract law. Without a written contract you are going to hope that a court will take your word over the other party’s. Further, there are certain contracts that are absolutely required to be in writing. For example, contracts that can’t be fully performed within one year must be written. These contracts are going to be unenforceable because of what is called the statute of frauds.
How are the rights and responsibilities going to be allocated?
When entering into a partnership, there are several questions that must be answered at the beginning. Failure to address these issues can lead to unintended consequences.
First, how are profits and losses going to allocated? If this isn’t clear, you have a risk of one partner claiming that because they spent more time or money on the business they should be entitled to a greater share of the profits.
Second, what is each partner contributing to the partnership at the start? One partner could be contributing cash and the other contributing property and know how. Are there situations in which a partner is required to contribute additional capital? These contributions, along with each partner’s allocation of profits and losses, need to be documented and reflected in what is called capital accounts. When maintained properly, the partner’s capital accounts will reflect each partner’s equity in the partnership.
Third, if there’s a contribution of property, is this property now considered property of the partnership or is it still owned by the partner? For example, what if one partner purchased a computer with his or her own funds for business use? The UPA provides default rules depending on whose funds are used to buy property and in whose name the property is titled.
Fourth, how is the partnership going to be managed? This is important because you need to lay out how major decisions are going to be made. Do bigger decisions require unanimous consent? What is the procedure for dealing with stalemate? You want to be able to run your business without formality slowing you down, but you also want have oversight between partners.
Finally, what is going to happen to the partnership assets when the partnership ends? For example, the UPA states that at dissolution, or break up, of the partnership there needs to be a final accounting or each partner’s capital accounts. Those with negative capital accounts could potentially be required to contribute more money. Those with positive balances in their accounts would get a final distribution.
What happens when a party breaches the agreement?
A properly drafted business agreement will provide a procedure that defines what happens when a partner believes another partner is in breach of the partnership agreement. For example, some may believe that if a contract is breached or a partner does not live up to their obligations, the other partner(s) may automatically declare that the deal is off and keep all contributions made by the breaching party. Not only is this not likely going to be the case, taking this approach will result in a breach of its own.
While it can be tempting to try to save money and skip the formality, it is significantly cheaper and easier to get ahead of potential disputes before they happen. Sure, you could save a few hundred dollars starting out. However, if things go wrong you risk spending so much more on legal fees to clean up an easily preventable mess. At a minimum, just a quick consult with a business attorney prior to engaging in a business venture with another party can help identify and deal with potential issues