What the Legal Battle of 2 Art World Giants Teaches About Partnerships

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Anyone not immersed in the modern art world may be unfamiliar with the two mega-artists, Frank Uwe Laysiepen (a.k.a. "Ulay") and Marina Abramovic, who went head to head in a Dutch court last week. But the implications of what happened there, the dissolution of their professional partnership (with Ulay the victor), apply to all sorts of entrepreneurs, artistic or no.

Related: Everything You Need to Know About Business Partnerships

First, some background: The Serbia-born Abramovic, 69, is sometimes called "the grandmother of performance" art, in which she's pioneered the practice of having observers actively participate in her pieces. She's described those pieces as focusing on "confronting pain, blood, and physical limits of the body."

West German-born Ulay, 72, is known for his experiments with photography. The two were a couple for some years and dissolved that personal relationship in 1988, in seemingly appropriate performance-artist fashion: Both started out walking from the opposite ends of the Great Wall of China and met in the middle to say goodbye.

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They reunited briefly in 2010, during a performance Abramovic put on at the Museum of Modern Art in New York, where she sat at a table, silently staring into the eyes of visitors. When, at one point, she opened her own eyes to see the next visitor, there sat Ulay. The video of her teary reaction has been viewed on YouTube some 30 million times.

But back to that breach of contract action in the Dutch court: Any business owner who has had to deal with a partnership gone bad knows the horrific experience a battle with someone who was once a close friend -- or lover -- can be. Ulay actually stated in part that, “…the massive legal battle with Abramovic was threatening my existence.” Indeed, the emotional cost of a partnership dispute is oftentimes more draining and costly than any other tangible loss in the battle.

Importantly, in this case, both artists had taken the time to sign a contract. The agreement between Ulay and Abramovic, signed in Amsterdam in 1999, laid out how they were to distribute the share of profits on the sale of their joint art, among other contract elements.

When their battle ensued, it became clear that the court case dealt with the royalties that Abramovic was contractually obliged to pay Ulay, or more specifically what he said she didn’t pay. The problem was that Abramovic had used a different equation as to the royalties owed, and relied on her interpretation of the contract.

The core issue finally came to light when the Dutch court explicitly ruled that the contract did not make clear how “gross income,” the key factor in the calculation of royalties, should be defined.

Related: 9 Ways to Negotiate a Contract Like a Boss

In the end, based on what some may argue were legal technicalities between Anglo-Saxon and Dutch law, Ulay won decisively and Abramovic was ordered to pay the royalities according to Ulay’s interpretation of the contract. This is where we as bystanders can take heart and learn from the situation.

What a partnership can offer you

A partnership can be the best thing that's ever happened to your business, or the worst, if it's entered into improperly. Accordingly, don’t be afraid of a partnership; just commit yourself to documenting it properly and considering all of the issues.

The partnership agreement and the setting up of a proper entity/structure for it is the single most important step in your partnership process. Indeed, it may even be more important than analyzing the merits of the project within the partnership itself. You could have the most potentially successful money-making idea in the world, but if the foundation for your partnership is faulty, the business will ultimately fail.

One of the key sections of any good partnership agreement is to nail down the definition of profits and when and how distributions will be made. Here are three tips that can help you in your joint venture or partnership agreements.

1. Be clear about the definition of profit.

Clearly, the problem in the Ulay/Abramovic contract was the definition of "profit." The two weren’t fighting over when the payments were to be made, or if they hadn't been made at all, but the amount. Think about non-cash expenses, such as depreciation or amortization. Also, what about capital improvements made near year's-end? One partner may think that that is a justifiable expense that affects the bottom line for profit distributions, while the other partner wants his or her share of profit ahead of any capital expenditures.

2. Talk about re-investment.

One partner may be going into the partnership planning to re-invest all the profits to maximize the future profits and the health of the company. The other may be entering into the agreement to create as much cash flow as possible and a strong ROI on the capital originally invested. Ironically, a lot of partners in a dispute whom I meet never thought to consider this before setting up the business entity online.

3. Agree about distributions dates and amounts.

Many partners forget that in the United States, most partnerships (i.e., LLCs) are flow-through entities for tax purposes. What this means is that the partnership may make money and profit that flows through on paper to the partners, and they’ll be taxed on those amounts even if there aren’t distributions. As stated, one partner may desire to re-invest most of the profits. So, make sure you not only agree on how much you plan to distribute of the quarterly or annual profits, but be sure that the distributions are made in time to pay taxes. You don’t want to have "phantom income" on paper and no cash to pay the tax bill.

4. Watch out for that phantom income.

This means income you are allocated on a K-1 from a partnership, but with no corresponding cash distributions made by the partnership. Importantly, if there are a lot of dollars at stake, always make sure to meet with an attorney and go through a list of partnership issues to be considered before entering into the contract.

Related: 6 Challenges Confronting Every Business Partnership

Remember, a partnership can be an amazing blessing in your life, or a terrible curse. Regrettably, it appears that it proved to be the latter for Ulay and Abramovic. Don’t fall into the same trap they did.