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Tuesday, January 4, 2011

Breaking Up Is Hard To Do

Although you hope it won’t happen, you need to plan for the day when you and a business partner will decide to go your separate ways. Thinking it through up front can prevent a lot of angst and bad feelings later.



While Neil Sedaka’s signature 1962 hit “Breaking Up Is Hard To Do” may have attempted to put an upbeat spin on an otherwise painful experience, the reality of business breakups is that they’re generally far more complicated than simply facing another person and saying “goodbye.” However, the breakup can be less painful if certain issues are taken into consideration when you form your business.

For example, suppose you establish a studio with another photographer. Since your lawyer or accountant advised you to form a corporation to help limit personal liability, you and your co-owner formed a corporation. And because you were trying to save some money on the front end, when setting up the corporation, you and your co-owner filed the minimal set of paperwork and perhaps even had a simple operating agreement prepared. Having gone through the steps of forming a corporation and observing the basic corporate formalities, you and your co-owner then started working the business, creating images for clients and drawing a salary.

Now, suppose that you and your co-owner have a falling out. One of you realizes that he or she is doing the lion’s share of the work, while the other is still receiving the same compensation for doing less of the work (even the most altruistic of people only will allow this sort of situation to go on for a time). Regardless of the reason for the falling out, you and your co-owner decide that the best solution is for each of you to go your separate ways. Now you’re faced with difficult questions. Who owns the rights to the images? Who owns the goodwill associated with the business? Who has the right to continue using the business name? And, of course, there’s the question that comes up again and again in disputes following the breakup of a business: Who “owns” the customers?

While there are some “default rules” associated with the breakup of a business, these rules will be anathema to most photographers. For example, after the business’ creditors have been paid, the remaining assets of the business generally are divided among the owners based upon each owner’s respective interest. When applied to the example above, the result is that one co-owner may end up owning rights to images that the other co-owner created; stated differently, the photographer/co-owner who did the majority of the work won’t be able to walk away from the business with the rights to his or her own images!

It’s possible to avoid some of these problems, however, by considering these and other issues on the front end, when you’re forming your business. If you follow a few basic steps, you should be able to avoid some of the more unpleasant aspects if your business breaks up.

STEP 1 Decide On A Business Form
While your lawyer or tax advisor may recommend a certain business “form” for your studio (e.g., sole proprietorship, partnership, corporation, limited liability company), depending upon a variety of state law issues, tax-related issues, and even personal philosophy and experiences as to which form may be best for a certain type of business, odds are good that they won’t be considering issues such as who will own the rights to the images that you create while working for the business. Indeed, while this sort of ownership issue may not have any impact upon the business form selected, it’s nonetheless information that you’ll need in order to prepare a proper escape plan (which we discuss in Step 3).

 

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