Article “What can be learned from family law when setting up companies?” by attorney-at-law Keijo Lindeberg
Corporate law and family law are, at first glance, two extremely different areas that have no common features. However, if you think about the emotions with which companies are often established and the mistakes that are made, you may discover that the similarities are unexpectedly large.
It does not matter if we speak about life partners or spouses, the recommendations of family law attorneys are the same: all agreements should be made in writing, and the roles of the parties in the relationship should also be clearly agreed upon.
For example, life partners buy a home together. It is agreed that one party commits to work and provides income for the family, and the other party devotes herself to raising their children. In such a situation, it should also be clearly agreed that these are the contributions of the parties, which the parties consider equal. As a result, the home to be purchased is jointly and equally owned by the parties.
If you look at the same example in the context of establishing a company, there is usually no problem with the partners not being entered in the business register when starting a business together. Unfortunately, it is often the only subject that is formalized. However, it may result in a dispute as serious as in the case of life partners if only one partner has been entered in the land register as the owner of their home.
The beginning of both a family and a business relationship is characterized by the fact that emotions are often more important than rational reasoning for guiding person’s actions. When establishing a company, one is convinced that the specific business partner is like winning a lottery. He seems to have all the skills and personality that the company needs. Instead of formalizing the agreements correctly, they think about what will be achieved in case of success, be it saving the world from the climate crisis or buying a Ferrari.
Returning to the main problems of starting a business together, there are two problems in particular:
- The evaluation of the business partner’s suitability (personal characteristics, technical skills or availability of free time) is incomplete.
- The role and obligations of the business partner in the joint business are undefined or they are defined so vaguely that it is essentially impossible to fix the violations.
Three simple principles help mitigate the aforementioned risks:
- All agreements of business partners must be formalized correctly and in such a way that it is clear what, when and in what amount everyone has to contribute.
- If possible, agreements should be formalized with the help of an experienced lawyer who can assess whether such an agreement can be effectively used in the event of a dispute.
- If the budget is too limited for a lawyer, it is recommended to have at least three people review the agreement. If all these persons understand in the similar manner what, when and to what extent each business partner must contribute to the company, there is more hope that in the event of a dispute, the judge deciding the case will also understand the agreement in the same way.
By following these principles, hopefully any non-cooperation will result in a rational termination of the business relationship, rather than an extremely emotional litigation comparable to child custody cases.
Attorney-at-law of Law Firm LINDEBERG
Attorney-at-law Keijo Lindeberg is a member of the Corporate Law Committee of the Estonian Bar Association, established on the basis of the rules of procedure of the Estonian Bar Association, the purpose of which is to assist and advise the bodies and members of the Bar Association in matters related to legislation or practice in the field of corporate law, analyse relevant legislation and legal practice, and draft amendments. This article reflects the personal views of the author.