March 31, 2023 • By Dennis Beaver
If you and a good friend or family member have been looking forward to going into business as partners, then today’s story will be especially relevant, and highlights why lawyers generally advise their clients to carefully think over the down side of getting into business as partners.
As there are several different types of partnerships, I am limiting my remarks to general partnerships, which is what most people think of when the word comes to mind.
I ran this question by a number of law professors at schools around the country and heard the same response, summarized as: “Law students – who themselves have generally never been in business – have little practical way of visualizing the challenges created by day-to-day operations when each partner in a general partnership has equal rights of control.”
More often than I want to see, clients come into our office, depressed and the first thing they say is: “I should have listened to my spouse.” As they open up, two things that led to the destruction of their partnership and business become clear:
(1) Their failure to understand what losing complete control over business decisions actually means.
(2) Lack of a partnership agreement–tailor-made for their needs and drafted by an experienced business lawyer. Unless addressed otherwise in an agreement, each has equal control over hiring, firing, purchasing, all the daily realities of a sole proprietorship. This opens the door to poor decisions, ill-advised purchases, plain wrong HR decisions, and the list could go on for pages.
“Why Pay a Lawyer?”
“Sal,” my East Coast reader, wishes that he had been told these things before he and “Ray” established their CAD (Computer Aided Design) drafting business as a partnership in late 2020.
“Each of us ran his own shop and we were individually very successful – in fact there was no financial or other need to blend our shops as we had expertise that most in-house designers lacked. We also got along well which was a plus. It just seemed logical to work together under one roof, minimize overhead and bring the benefit of our experience to our clients,” he says.
Skipped an Important Step
You would think they would retain a business law attorney to draft a partnership agreement tailored to their specific needs. Right?
“We should have but thought, ‘Heck, we’re educated, so why not just purchase a prepared form online and fill in the blanks,’ which is what they did, failing to address steps to take if things go south.”
And did things go south? You bet they did when Ray went on a two month-long vacation to Europe.
Had Been Discussing Solar
“Initially we were doing very well and had discussed solar for our office – which is an older home converted to an office We reside in a small town that wants energy efficient/solar installed when possible, but never reached agreement as to actually doing it.
“I got the shock of my life when my wife and I returned from our long-postponed European trip to find our office roof covered with gleaming solar panels! And, with an equally shiny $50,000 UCC-1 (lien) filed against the property for a leased solar system!”
There was more that frosted Ray. “The literature given Sal described not just a solar system, but included energy efficient air conditioning. However, the actual contract and financing agreement that he signed did not make any reference to the A/C.”
While the documents connected to the sale of the solar system failed to give specifications for the A/C system, emails from various sub-contractors referenced things like, “A/C back ordered – expect delivery next week.”
But “next week” came and went, with no appearance of the unit.
“What are my rights as a partner in this situation?” Ray wanted to know, adding, “I should tell you that my wife was against my decision in the first place, telling me, “Be careful of Sal as he acts impulsively, unilaterally doing things that I would never agree to, and the decision to lease an expensive solar system makes no financial sense as we are both in our late 60s and will never recoup energy savings.”
Rights and Duties of Partners
It is evident that the decision to buy a solar system should have been reached through a joint agreement of the two partners and Sal, in my opinion, breached his fiduciary duty to Ray. Partners are agents of each other, and owe each other fiduciary duties – trust – and must act with good faith.
Obligating both partners individually – as that’s precisely what happens in a general partnership – with such an extraordinary expenditure likely not justifiable in any event unless Ray caves in and remains quiet, I can see painful litigation around the corner.
I’ve often heard, “If you would not feel comfortable going on vacation with this person, then do not get into business with them as partners.” And it makes good sense.
But there may be a way to reduce the actual cost of the solar system if this phantom A/C can’t be proven. And here is where it gets sticky.
In recent months I have seen virtually identical scams where energy efficient A/C is promised to be part of a solar system but never shows up.
It will most likely be in both Ray and Sal’s interest to cooperate in efforts to obtain a reduction of the lease amount if an inference can be raised of knowledge by the solar company and leasing agent that there really was no A/C – that it was so much hot air.
Few lawyers will represent both partners to avoid a conflict of interest. But, sadly, this is one more reminder that it isn’t how much you pay a lawyer that matters, rather what competent representation will save.
Dennis Beaver practices law in Bakersfield and enjoys hearing from his readers. Contact Dennis Beaver.