Question

Janice Brooks owns her own hairdressing company called Janice’s Supercut. Her friend, Paula Brown, is also a hairdresser and works for another salon who specializes in cutting hair for males. They decided to go into business together. Paula is willing to take out a loan for $100,000.   They are moving the business from Janice’s house to a new place in the nearby mall. The new name of the business is called Brooks & Brown Hairdresser Salon. They decide orally that Paula Brown will receive 60% of the profits and Janice Brooks will receive 40% of the profits. Paula Brown’s husband has decided to open up his own business. Paula is helping him out and spends no time in the business. Janice Brooks hires another hairdresser to keep up the demand for the male patrons.

Janice feels that Paula should not receive 60% of the profits because she spends no time in the business which has greatly increased the amount of time that Janice is spending. Paula feels that the salary that the new hairdresser receives should come out of Janice’s 40% share.

Many arguments between these new partners are causing a great deal of problems.

Based upon the above information, what would you have done differently? Explain in detail your reasoning or response.

Answer 1

The very agreement between the parties i.e. Janice Brooks and Paula Brown is not enforceable in the court of law as it lacks words on a piece of paper. Oral agreements cannot be enforced in any part of the world. It proves good as long as mutual consensus is maintained between the parties.

There are following steps that must have been implemented from start to avoid future dispute.

1. Partnership deed between the parties must be prepared in writing, which mention the profit sharing ratio between the partners as well as the average time that needs to be spent on the working of the business so, as to avoid future dispute regarding the same.

2. Treatment of the future expenses like employment of additional labor must be mentioned in the partnership deal, whether they will be deducted from a particular partner's profit share or charged as expense before calculating the profit share of the partners.

3. If a partner is spending more time than specified in the business, then a proper compensation must be decided between the partners and vice versa in the case of spending less time.

4. All the agreements must be in writing and if any further change decided must be incorporated in the deed.

5. Course of action in case of dispute must be decided in advance and must be adhered to.

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