One of the most common small business structures in Australia is a partnership, whereby two people agree to go into business together and each takes a stake in both the businesses profits and losses. In most cases however, no formal agreement is entered into between the partners as they are usually close friends who don’t foresee anything going wrong.
However starting a new business is not always champagne and roses and circumstances can change as quickly as the wind. When things start to go off the rails there is inevitably going to be tension between the parties that can lead to a split in the partnership. But what happens if no formal written agreement existed and you never sought legal advice?
A recent example from America comes from the splitting up of the world’s best known font design firm, Hoefler & Frere-Jones.
The partners of the firm, Tobias Frere-Jones and Jonathan Hoefler, recently decided to go their separate ways. In a lawsuit filed in New York type designer Frere-Jones claimed that Hoefler cheated him out of half of the company and tricked him into transferring ownership of several fonts, such as the ‘Whitney’ family of fonts, which are worth over $3 million.
Frere-Jones admitted that their partnership was never formalized in writing and when he confronted Hoefler about this, Hoefler refused to do so.
Hoefler has in turned denied these allegations and sought to have the complaint dismissed as it was made outside of the statutory limitation periods. Hoefler is his defence has also stated that Frere-Jones signed an employment contract that clearly stated his was an employee of the company and had no equity in it. He also states that Frere-Jones signed a ‘Sale and Assignment of Type Fonts Agreement’ in which he agreed to sell, assign and transfer all right and title of his type fonts for the sum of $10.
The circumstances of the above case illustrate how two once close friends can be torn apart by business and while they may have once thought there was no need to formalize their partnership, they are left fighting it out in court.
If you’re considering entering into a business partnership, it’s important to formalize the arrangement via a legal agreement, even where you’re family members or close friends. A few tips include:
- Ensuring you discuss what will happen if the partnership or business fails;
- Always putt your agreements in writing; and
- Each party should obtain their own legal advice before signing an agreement.