The New Business Venture: Entity Formation, Partnership Agreement, Negotiate Lease
Case Study: The following represents and actual matter in which James E. Clark served as counsel. Names of parties and other identifying information has been changed to protect the identity and confidences of the parties. The following represents a sampling of the type of work Mr. Clark has done in the past and in no way serves as a representation of any outcome in any other situation. The following is for educational purposes only.
Client: Two individuals, long-tome friends, first-time business partners entering a business venture together.
Background: Clients were on the verge of entering a business together opening a retail store in a local town. One partner was providing the funds and the
other was providing the expertise and labor. The two had found the perfect location and negotiated a reasonable rent.
Problem: Clients needed an entity formed, a partnership agreement drafted to handle any contingencies and to negotiate the terms of their lease.
Solution: After reviewing each individual’s personal financial and tax profile including telephone conversations with their respective accountants Mr. Clark formed an LLC as their operating entity. Mr. Clark then sat down with both partners to review the major issues to consider when drafting a partnership agreement including a standard checklist Mr. Clark has prepared to illicit productive discussion among business partners. The partners considered the issues had a separate meeting together to discuss and then came back to Mr. Clark with specific instructions for their agreement. Mr. Clark then drafted an
operating agreement (partnership agreement) handling contingencies if one partner died or became disabled and how to handle partner’s selling their
interest or leaving the partnership. Simultaneously, Mr. Clark marked up the lease agreement the partners received from their landlord. Mr. Clark’s
markup raised points that the partners needed to consider further and to negotiate with the landlord. Since the partners were trying to save money, they only wanted Mr. Clark to review and comment on the lease and they would handle the negotiation with the Landlord themselves. After several rounds back and forth with the landlord and the landlord’s attorney, the partners decided to let Mr. Clark finish the negotiation. After reaching terms that were acceptable to both sides they signed the lease, signed the partnership agreement and opened for business.
Postscript: One year later the partners returned to Mr. Clark because a dispute had arisen between them and they were looking to dissolve their partnership with as little expense as possible. It appeared that the working partner was not making enough money with the venture and wanted to withdraw, and the funding partner lost faith and trust in the working partner. At the same time an employee of the business venture was interested in taking over management of the venture for substantially less compensation than the previous working partner. Since Mr. Clark represented both of them in the formation of the entity, he had a conflict of interest in taking a position advocating for one or the other. Mr. Clark recommended that they each hire their own counsel to work out their differences. However, the partners wwre largely in agreement on what they wanted and were seeking to avoid the expense of hiring separate counsel with the possibility of things getting more adversarial. After fulll disclosure, the partners requested that Mr. Clark serve as an impartial mediator and to draft a simple agreement to unwind their association and bring in the new partner. After two meetings with the partners, they signed an agreement whereby the working partner withdrew, but maintained a small passive financial interest in the venture, and the new working partner was admitted. The business continued to operate, and the partners avoided a costly litigation by relying on the terms of the initial agreement drafted back when their relationship was stronger. Even though each partner was not completely satisfied with the outcome, they were bound by the terms of the agreement to break-up the partnership. In the end they avoided a costly court battle which would have destroyed the business, and now each retains a profitable interest in the company.
James E. Clark is a New York business attorney. For more information on starting a business, entity selection, entering or dissolving a partnership arrangement or negotiating a commercial lease please visit our website at https://www.clarkslaws.com, call his office at 631-539-8889 during regular business hours or feel free to e-mail Mr. Clark directly at jclark@clarkslaws.com.
Legal disclaimer: IMPORTANT LEGAL NOTICE: This post is not legal advice does not create an attorney-client relationship. This and all posts on this website are intended as general information, and are provided for educational purposes of the public, not any specific individual. If you would like to obtain specific legal advice about this issue, please contact an attorney in your state. Mr. Clark is licensed to practice law in New York.
