So, you want to start a business ? Tips for Avoiding a Debacle

     Now that the economy is up and running again, it is time to talk about business.  This is the time for business people start to talk about starting new businesses and investing.  There are many options for creating entities which will provide protection to investors in connection with  new businesses. An entity that is often used by investors is something called the de facto partnership. This  occurs when two or more people get together to start a business but never really decide whether to form a legal entity. In fact,  what often happens is that the business formed by two or more people rolls merrily along until something goes wrong. That is when the lawyers are called and a request is made to figure out, after the fact,  what the parties intended and how the assets and liabilities of the business should be apportioned.

     Perhaps we can all agree that this is less than an ideal circumstance. Competent business people should decide in advance, together with their counsel and tax consultants, the best entity to form in order to provide the maximum legal and tax protection. The Florida Legislature, however,  has recognized that many people simply do not have this level of foresight. Instead, what often happens is that a business is begun with only a trade name or a DBA (“doing business as” name). In cases in which the partners decide to go their separate ways, there is often a disagreement among the partners as to how to divide assets and/or profits and  it often becomes the job of counsel, with the assistance of the Court, to figure out who gets what.

     In Florida,  a business that is carried on by individuals as co-owners for profit is generally considered to be a partnership. Things get sticky when it comes time to figure out what percentage of ownership interest each party has. After all, not all things in life are equal. For example, many businesses are started with the capital of one partner and the “sweat equity” of the other. How profits are split in this business can be difficult to determine, particularly at the outset.  If the business has a track record, Courts may look to how the parties have treated one another historically. If there is no track record, it becomes more of a “he said, she said” contest. Under these circumstances, Courts will listen to the oral testimony of the parties. That means summary judgment likely will not be granted before trial.

     Using litigation as a vehicle to determine the rights and liabilities of the parties under these circumstances can be time-consuming and expensive. Accountants may  have to be called to testify regarding the finances of the business.  A value will have to be placed upon the value of the business and the contributions of the sweat equity partner. This too will require expert testimony. The bad thing about expert testimony is that it costs money. Imagine that you will have to pay counsel to litigate the case and then pay another person – the expert – to review the facts and testify. What was an expensive proposition to begin with becomes even more expensive.

     So what is the solution?  Competent business people should give careful consideration to forming a corporation, limited liability company or a partnership with a written partnership agreement prepared in advance. This type of planning and forethought will often prevent problems later on. After all, if their was a clearly drafted written agreement defining the rights and liabilities of the parties what is there to argue about?

     Unfortunately, there are some people who simply do not agree with this philosophy and would prefer to simply wing it (you know who you are).The person who prepares a written agreement in advance is the same person who changes the oil in their car on a regular basis. The person who ignores this is the same person who never changes the oil in their car, allows the engine to seize up and causes their car to suffer major repairs.

     What type of business person are you ?





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