The Importance of "Papering the Relationship"

The Importance of

In the beginning of every business partnership or venture, employee / employer relationship or new client engagement - everyone is happy.  All partners are on the same page, excited to be involved and ready to dedicate all of their time to the venture.  Every employee or independent contractor is happy with their planned responsibilities, path of growth in the company and expected compensation.  All new clients are excited about the potential business relationship and the deal they struck!   Everyone is on the same page, everyone is optimistic.  Long story short - the relationship is going to be an instant, smashing success!

Unfortunately, things don’t usually work out that way.  Partners’ expectations of the business can deviate over time.  An owner’s personal financial situation may change or they experience an unfortunate life event, such as a divorce, disability or, God forbid, a death.  Employers may become dissatisfied with an Employee’s work product, the company may change paths or an employee may become disenfranchised with their growth in the company.  Client relationships can break down or service needs change.  All of these events can have monumental impacts on your business.

To put it another way, life happens!

Ironically, the beginning of any business relationship is when it is prudent to pause, take a breath, and consider what happens if the relationship doesn’t work out.    

We advise every client to think about the end (exit) while in the place of creation (formation), and all of the iterations between now and then.  What are my obligations if our company needs additional capital?  If my employee leaves, can they take my clients and compete with the business?  What if a client disputes and invoice and refuses to pay?  What does my timeline for growth look like?  How do I best position my company for sale?  All of these questions frame the legal foundation of the company.

 No matter how great things might seem today, there is always a twist in the road.  It is essential that you paper the relationship at the outset of any engagement.  To put it another way, you should dedicate the time, energy and resources to enter into a written, legal contract which formally defines the structure of the intended relationship, whether that be in the form of (i) a detailed operating agreement for a new limited liability company, (ii) an employment or independent contractor agreement for a new hire, or (iii) a master services agreement for a new client or customer. 

At a minimum, you will want your new partner to execute a contract that lays out the details of the relationship and thoroughly considers and speaks to all of the likely consequences of such a relationship, whether that be the termination of an employee, a Member desiring to transfer their interest to a third party because of a life event, or a client refusing to pay for additional services rendered.

We really do get it - when everybody’s feeling good, you don’t want to consider and spend money to plan for when everyone is mad.  However, that is our basic job as corporate attorneys - to plan for and look out for your best interests in the written agreements for when things break down.

None of us can predict the future – which is why we strongly recommend that you should take the time and dedicate appropriate resources up front, and “paper the relationship”.

If you think you might need assistance with general corporate drafting services, please contact us for a free consultation.

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