We have all heard the saying; the road to hell is paved with good intentions. That could not be truer than when people, with good intentions, enter into business relationships whether Limited Liability Companies, Partnerships, Corporations, or any other businesses entity. This is especially true when those good intentions are between good friends or members of families. It is precisely because of these good intentions and the notion that friends and relatives will never harm each other, that they form business relationships with a handshake, oral agreements and no written contract. This is a recipe for disaster.
This article does not discuss those times when contracts are absolutely necessary to be written under the California or whatever State Code you are operating under, based on what is known as the “Statute of Frauds”, primarily because it would be far too much to put into an article, and it would stray from the main reason for writing this particular article.
When originally organizing a business relationship one of the most important elements is to memorialize (write) the most important points of that relationship. In an LLC that written document is called an Operating Agreement. It spells out the rights and obligations of the members of the LLC, who is or are the Managing Members, how money is taken out, records kept, how the LLC is to be dissolved and a host of additional and important agreements. In a corporation the document is known as a Shareholder Agreement and it is akin to the LLC Operating Agreement, but also includes specific and necessary information concerning meetings of shareholders, the board of directors and any committee chosen by the board. In a partnership an agreement should include most of the information contained in the LLC Operating Agreement, particularly responsibilities of the partners, how money is to be distributed, how the partnership is to be dissolved and many additional items.
Written agreements for any of these entities should also include the scope of employment, salary, perks and other items normally in an employment contract. These can be incorporated into the agreements referenced above or separate and distinct agreements between the parties.
Although these agreements are the backbone of the relationship between the parties, provide the necessary understanding of how they work together, take their salaries, profits, costs and handle their banking, all too often friends and relatives forgo these written steps, because they think the unthinkable will never happen to them. They truly believe, their long time friendships will continue to withstand the test of time and business, their familial relationships are bonds that will never be broken so why do they need to do anything more than shake hands and orally agree to the many things mentioned above.
Unfortunately, they learn in many cases friendship and families do not necessarily mean a whole lot when the almighty dollar is involved. They learn their failure to enter into a written agreement can cost them their friendships and even their family relationships. In many instances the closest of relatives walk away never speaking to one another again.
These relational disruptions are serious enough, but they also learn, in many cases, they end up in a legal battle that causes them to spend small fortunes on attorneys, none of which they can recoup, because without a written agreement that specifically allows for the prevailing party to be entitled to his/her legal fees from the non prevailing party, each party is responsible for their own legal fees and costs.
So much of this ill will, financial disaster and destruction of families can be avoided by simply sitting down, discussing in advance the goals of your business entity, the anticipated responsibilities of each person, the remuneration and how the entity will be run and wound down.
Short of doing these things and memorializing them in writing too many times we have had to represent one party against another in or out of court. The expenses have been, in many cases enormous, and in each case the cost in relationships has far outweighed the economic loss.
Southern California Mediation Partners, LLC has recently mediated a case between two old time best friends. One worked for the other as a building contractor and since they were such great friends and trusted each other with their lives, they did it on a handshake and no written agreement. Notwithstanding the fact that this is the type of agreement that needs to be in writing under the California Statute of Frauds, the contractor filed a lawsuit against his friend. Of course this was met with a cross complaint and all out litigation ensued. After spending far more money than the case was even worth, but willing to do so because they now hated each other, they came in for mediation.
Mediation was for them the best decision and would have been from the beginning rather than chose to file a lawsuit. Since there was no written contract neither party was entitled to legal fees so only the attorneys were making money. Mediation gave these men an opportunity to sit together and discuss their problems with one another rather than do battle in court. Mediation has been used in many cases to heal wounds between relatives and instead of costing hundreds of thousands of dollars, results, both economic and relational have cost under $10,000.00 and in most cases less than $5,000.00.
Another example was a call and then several e-mails we received from an LLC where in fact a written Operating Agreement was signed by the three members, but it amounted to one page, rather than the normal 8-40 page document. As a result 90% of the usual and customary agreements were not contained in the document. Of course I immediately asked if all the members started out as best friends, and was not surprised by the affirmative answer. They were going to have to litigate over one member taking $4,000.00 a week and another only $1,000.00 a week, two ganging up on one, when they were supposed to make unanimous decisions and a host of other issues. Of course this Operating Agreement was also devoid of any attorney fee provision so they would each be responsible for their own fees.
The best alternative for them was mediation to avoid the unnecessary litigation costs and to try to somehow save their long time best friend status. That will occur soon and just the fact that they will mediate means they understand both the economic and relation saving aspect of this process over litigation which they realize is mean and ugly.
Although it is legal to have oral contracts in many cases, it is irresponsible in most, and the reasons given for doing so, are foolish and in most cases will cause financial and relational harm.
Mr. Eichberg brings a lifetime of knowledge of the law and practice in varied disciplines. Click here for free information and reviews Mediation [http://scmp-mediation.com]
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