How to Avoid Accidental Partnerships in Business

How to Avoid Partnerships in Business and other alternatives from a DFW business lawyer

By Karen Ensley, Board-Certified Construction Law Attorney

Partnerships in business can be great but bringing on a partner brings with it serious duties owed to your partner that you might not realize. If you’re looking for a long-term relationship with someone that you want to “grow a business with,” that’s great. If not, here are some options.

Teaming Relationships

Teaming relationships are not business partnerships in the true sense, but they are formal agreements to team with another person or entity for the mutual benefit of the team. Teaming relationships in the construction world are most often created between a prime contractor and a subcontractor, with the prime providing the financing and the subcontractor bringing specialized expertise or sometimes minority status. The team then seeks work, as a team, on one or more projects, with the promise that if the project is awarded to the prime, the prime will in turn award the subcontractor the work reflected in the teaming agreement. To induce the prime to make this promise, the prime often requires the sub to promise that it will not submit a bid to any other prime competing with the teaming prime for the project at issue.  If the contract is not awarded to the prime then neither of the team “partners” are afforded the work, and the team can enter into a new agreement for other projects or decide to seek work with others of their choosing.

Joint Venture

A joint venture is similar in many respects to a teaming agreement in that it generally arises from a written agreement; but unlike a teaming agreement, the joint venture agreement partners are more often viewed as equals.  A joint venture agreement can be created for many purposes, but generally it is created for a specific project that is intended to last for a finite period of time.  Sometimes one of the JV partners has access to a coveted relationship, has bonding or financial capacity that the other does not, has expertise or disadvantaged business certifications needed to secure a project, or any other number of reasons.  The JV partners agree to team up, each bringing something unique to the partnership. JV agreements should be in writing, clearly identify each partner’s duties, what projects will be pursued by the JV, how and when profits are divided, etc.  Joint venture agreements are not filed with the Texas Secretary of State and are flow-through tax entities.

Bonus Structure

What if you simply have someone with great skills in a specific area that you want to incentivize to help build your business without making him/her a partner? Partnerships in business are long-term relationships, sometimes lasting decades. Perhaps this person doesn’t have great credit, is going through a divorce, or you simply don’t want to give him/her a voice in how the company is run.  How then do you create “buy in?” Consider a robust bonus structure that recognizes the person’s unique but limited talents.  Keeping that person’s eyes on the bottom line by tying compensation to profitability will keep him/her focused on producing their unique services without the distraction of trying to manager other aspects of the business.  Realistic expectations reduced to a written agreement that clearly spells out duties and compensation, tied to bottom – not top – line profitability is the key to success.

Partnerships in Business

Of course, if a partnership in business is truly what you’re after, there are many options available to you. You can choose from general partnerships, limited liability partnerships, or others.  Just remember that partnerships are generally long-term affairs, with fiduciary obligations and many times liability for decisions made by your partner of which you were not even aware.  They can be created purposefully, as my partner and I have done, but can also be created without intending to do so.  Somewhat like common law marriage, you can find your self in a de facto partnership, sometimes even without specifically intending that result.

So, the next time opportunity comes knocking, consider your options. You may have more than you thought.

Karen Ensley
Ensley Benitez Law, PC
469-983-6500
karen@eblawtexas.com

© Karen Ensley and Brian Benitez, Ensley Benitez Law, PC, 2021. All rights reserved. This article is provided for educational reasons exclusively and is not meant to be construed as legal advice. Ensley Benitez Law, PC, will represent you only after being retained and that agreement is made in writing.