The Problem with the Number “2” in Business

Author: Dustin Wetton

Many great things can be made from the combination of two people: a beautiful marriage, a great duet, a first kiss, and even an agreement. However, in business formation, this is often a problematic number. Many lawyers find joy in forming a business for an individual or for three or more partners, but with two there seems to be too many problems.

Take for example the two friends that decide to open a business together. As friends, these two people choose to be fair with each other and split everything equally down the middle. There is trust, respect, and a mutual desire to do what’s best for the business. However, what happens when one of the friends is forced to file personnel bankruptcy? What if they get a divorce and their disgruntle former spouse seeks to have a quarter of the business interest? Or what if the friend for some reason decides not to be a friend anymore and this lack of friendship turns into a lack of mutual respect and turns from a desire to do best for the business into a desire to do what is best for that person. What happens to that business 9 out of 10 times? It fails.

This is found too often in business and in all types of entities. It doesn’t matter if the business is a corporation or a basic partnership, when the company is formed with just two shareholders, two partners, two managing members, and no other actions are taken, the company is headed for disaster.

One of the best solutions to this dilemma is a buy/sell agreement. This simple tool is very similar to a pre-nuptial agreement, but unlike marriage, it has what is best for the business at heart. A buy/sell agreement can be used to create triggers that would allow the one business partner have more control than the other partner in making management decisions, often ending the control of the person who causes the trigger. For instance, if a partner files personal bankruptcy, that partner can lose their ownership interest in the company and it protects the company from that bankruptcy. There can also be triggers if the two owners cannot decide on any shareholder agreement or partnership agreement, a trigger that would allow a break in the stagnation.

It’s good to form a business with a friend, but both friends want to be smart and know that eventually something can happen to wrong them or a disagreement about how to manage things can come about. It is best to accept that Murphy’s Law is most often true; otherwise it wouldn’t be called a “law”. If you are in a business of two, or are going to form one, do the right thing, draft a good buy/sell agreement.

www.lauruslaw.com