Those of you outside of the Dallas-Fort Worth Metroplex might not be aware of an Arlington woman’s lawsuit against the publisher of the ‘Fifty Shades of Grey’ trilogy (the “50 Shades Case”). In a recent decision, a Texas trial court found in favor of the Arlington-based Plaintiff (no amount awarded yet, that’s the next step in the suit). You can find a summary of the case’s status here. And, although it remains to be seen if the decision will be appealed, there are a few lessons that all entrepreneurs can learn from this case:
1) Choose your partners wisely! Make sure that you know who your going into business with. Even if it is a lifelong friend, do some basic due diligence and make sure that your potential business partner is on the up-and-up. Look for excessive debt, credit problems, prior lawsuits filed against them, and, yes, even check for outstanding warrants. In the 50 Shades Case, although the parties may have began doing business in good faith and openly and honestly with one another, that appears to have changed when big money prospects arose. Which, brings us to lesson number 2 . . .
2) Put the proper paperwork in place. Even if your business partner is someone that you’ve known your entire life (or even your spouse) make sure that you put the proper formation paperwork in place. Many people think that formation is “complete” after they register with the appropriate governmental entity (usually the Secretary of State and/or County of principal place of business). Technically, this may be correct. However, to fully protect yourself, you need to make sure that you have the appropriate Bylaws, Company Agreements, Meeting Minutes, etc. in place. If the parties in the 50 Shades Case had put the proper partnership or company agreements in place, who owned the company would not have been at issue and any profit sharing and percentage ownership would have been clearly spelled out, which could have benefited both parties. Granted, having a document in place will not prevent a partner with an intent to defraud you from attempting to do so, which brings us to lesson 3 . . .
3) Stay informed. You can (and should) trust your business partner. . . but trust and verify. Make sure that you, as co-owner/partner, are receiving all reports that you should be, carefully review your partnership statements, review the books and bank statements (you have a legal right to do so), don’t be afraid to ask questions or to review receipts or invoices or other back-up information, and don’t cave in to bullying or obstructionist behaviors (“You don’t need to see that.” “I’ve got it covered.” or “What, don’t you trust me.”). Also, make sure that you’re adhering to the corporate protocols and any legal requirements for making and reporting distributions, raising salaries for officers & directors, and making large purchases or investments.
Taking the above steps may not prevent a partner from acting badly, but you’ll be in a much better position to identify the potential for problems and recognize them sooner rather than later.
FOR INFORMATION ON COMMON PROBLEMS WHEN FORMING AN LLC, see my related blog post. FOR TIPS ON HOW TO SELECT AN ATTORNEY, check out my PDF on how to select the right attorney for your business.
Constance Hall, an experienced legal, marketing and client relationship professional, is licensed to practice law in Texas. For more information, if you have questions, or to contact Connie, email her at email@example.com.