How to Guard Against Irresponsible Startup Partners

Real world strategies to protect new businesses from theft, administrative errors and irresponsible partners

Q.  I'm starting a business with two buddies. We're all freelancers and accustomed to a fairly unstructured work day. I know it is wishful thinking to assume we'll always get along. Each of us will own one-third of the company. I'm interested in knowing what we can do to prevent one partner from misusing company funds.

A.  Someone once said "Success depends on your backbone, not your wish bone." You're right. It's probably wishful thinking to assume three friends will always agree on how to manage a startup business, especially as your company progresses to full scale operations.

To minimize nasty financial surprises and partner misunderstandings it's important to establish some basic policies governing day to day business operations.

In first-time partnerships involving good friends, it may be worthwhile to invite a mentor or other independent advisor with venture building experience to facilitate your first partnership planning meetings.

As a starting point, talk through how financial and purchasing decisions will be made. For example, can a partner buy or lease new equipment or open a credit line at an office supply store? What authority does a partner have to promise discounts to customers? What happens when the partners disagree on a new initiative? Will the majority rule? Work through the issues and make a formal record of your decisions.

When you set up bank accounts, establish limits on check writing authority. Many partnerships require two signatures for payments over a certain amount. If you choose to bank online, make sure the service can reasonably restrict account access according to your company's needs.

Agree who will be responsible for accounting, paying bills and preparing state and federal tax filings. But watch out. Just because one partner agrees to oversee bookkeeping matters doesn't mean the other partners are free from responsibility. The liability for correcting filing errors or paying back taxes is "joint and several" meaning the partner with the largest personal bank account could end up paying most or all of any unpaid taxes.

Other areas of potential trouble are credit cards, equipment leases and office leases. While it may seem as though an obligation is taken on by your company, in most cases the fine print says otherwise.

For example, American Express' small business card application reads that the person signing the application is personally liable for all charges to the card plus all other purchases made on cards associated with the same account. And so if one partner incurs a big bill that is not authorized by other partners and beyond the company's bank balance, then the person who signed the original account application is personally liable for the entire bill, plus accruing interest. Yikes!

Clearly, the best way to limit your personal potential liability is to read all agreements. If you don't understand something, don't sign. If you are uneasy about your buddies' business judgment, then don't join in as a partner.

Here's one final recommendation. The smartest business people I know consider the downside of every deal just as much as they fanaticize about the upside. If you decide to organize your partnership, hire a lawyer to develop formal partnership agreements including the procedures for buying out rogue partners or dissolving the partnership altogether.

Yes there are risks and rewards in everything we do as innovative business builders. But more rewards seem to go to entrepreneurs like you who take the time to ask questions and manage risk in a conscientious way. Well done.

Take Command Action Step

Volunteer to write your partnership's first business plan. Challenge yourself to outline key operating milestones, financial needs and service pricing guidelines. Don't join the ranks of good buddy partnerships that feel they can't benefit from the discipline and direction of a business plan. You can do it!

Do you need time-saving tips to help fund and grow your business? Ask Susan How! Write to small business funding expert Susan Schreter at susan@takecommand.org