All in the Family

The first time Seth Davis formed a company with a partner, the business fell apart. So the second time around, he decided to join up with one person he was sure he could work with successfully: his mom.

Davis, 33, like many budding entrepreneurs, was seduced by the Internet when he first decided to go into business for himself. He teamed with a friend in a Web venture after graduating from Pepperdine University’s Graziadio School of Business in 1997. Before long, the company was drowning in debt as it spent heavily on efforts to dredge up new clients.

In the end, Davis said he lost a good deal of money but gained invaluable experience.

Seth and his mother, Rhonda Davis, founded Davis Risk Services in 1999. The business, which operates out of Rhonda Davis’ Encino home, performs claims investigations and risk management consulting in malpractice cases, usually on behalf of hospitals or other health care service providers who have been sued by their patients.

Though the Davises know well how easily even the closest relationships can go awry when two people go into business together, they’re confident it’s a team that will last.

“Seth and I have always, except for a period during his teenage years, had a very close and unique relationship,” Rhonda Davis said. “The very worst thing that could happen, we decided [when we started the business], was that it would fail and we’d each have to get a real job.”

The partners early on divided their responsibilities according to expertise. Rhonda Davis, who is divorced, worked for 18 years at the Van Nuys-based claims adjustment firm of Schiffrin, Gagnon & Dickey. She handles most of the company’s investigations and consulting work, though her son, who also has experience as a claims adjuster, pitches in.

Seth Davis uses the knowledge he gained while earning a bachelor’s degree in business at Pepperdine, as well as marketing expertise he acquired during a stint at his mother’s old employer, to oversee other aspects of the business--such as accounting, marketing and client development.

The Davises declined to provide figures for their business, but Seth Davis said revenue doubled in its second year in operation and the company is in the black. They recently hired their first employee, and Seth’s younger brother Bryan Davis also works for the company.

Davis Risk Services was named Outstanding Small Business of the Year 2000 by the United Chambers of Commerce of the San Fernando Valley, a group that works in the common interests of 23 separate chambers throughout the Valley area.

“We think this individual [Seth Davis] is exemplary,” said Bill Powers, vice chairman of the United Chambers and head of the committee that served as judges for the organization’s annual awards ceremony. “He’s overcoming a physical ailment and doing good for the community, and from what we hear, in an ethical way.”

Seth was born with multiple sclerosis, a disease of the central nervous system whose symptoms vary widely, sometimes occurring only in specific episodes.

Among his other professional and charitable activities, Davis is active with the National Multiple Sclerosis Society. He is also president-elect of the Encino Chamber of Commerce.

“If anything, the M.S. has kind of sped me up,” Davis said. “I don’t know what my time frame is, as far as when I’m going to have another episode. So I’m trying to cram it all in.”

Although mother-son business partnerships are relatively unusual, those between friends and family members are not. The partnership remains a common type of start-up business arrangement for a variety of reasons, experts say. Having a partner spreads risk, adds expertise, boosts financial resources and sometimes has tax benefits.

Because the Internal Revenue Service taxes partners as individuals, partners whose business is losing money can write off their losses on their own tax returns--something corporate shareholders can’t do.

But there are profound disadvantages as well, notably the principle of unlimited liability.

If one partner in a business rings up debts in the name of the business, the other is liable to pay those debts even if he or she knew nothing about them. Obviously, this makes it very important to find a trustworthy partner.

“Partnerships are not only a legal entity but an amalgamation made up of human beings, with all the weaknesses of human beings,” said John Tumpak, director of public affairs for the Glendale Small Business Administration branch and an instructor on small-business issues at Glendale Community College. “It’s nothing but a business marriage, really.”

Even partnerships between family members can be dangerous, experts say. Tumpak cites the case of a man he knows who got into a partnership with his half-brother, only to discover that his relative was skimming money.

A nasty lawsuit resulted, not only splitting apart the business but also deeply dividing the entire family.

Seth Davis is confident nothing like that will happen to him. “A lot of that [trouble between family partners] comes down to greed,” he said. “I can’t speak for my mother, but I don’t think she’s in this to become a millionaire and take it all away from me.”

Rhonda Davis agreed. “Seth knows that eventually he’s going to be responsible for taking care of me in my old age, and he know it’s in his best interest to make sure I’m financially solvent--so I don’t have to live with him,” she said.

Because of the dangers that go with partnerships, particularly in regard to liability, small-business experts universally advise hiring a lawyer at the beginning of the partnership and hammering out detailed legal agreements that spell out property and liability issues in case the partnership should be dissolved.

“The most important part of a partnership agreement is how you get out of it,” said Allan Sher, chairman of the Los Angeles chapter of the Service Corps of Retired Executives. “When a couple of entrepreneurs come to us, they’re always excited and they think they’ll never split up. But we tell them, ‘You’ve got to do this. You’re crazy if you don’t.’ ”

Even partners as close as the Davises are advised to put together such agreements, and in fact, they say they have drawn up all the appropriate documents. But they’re pretty sure they’ll never need them.

“I don’t think our relationship has changed [since becoming business partners],” Rhonda Davis said.

“Because we know each other so well, real explanation is not necessary. I just say two words and he seems to know what I mean.”