A business partnership can be a great arrangement to allow you to leverage the talents of other people to grow your company, hand down your business to the next generation, or share the proceeds of your work with others. Many partnerships are formed between two or more people who intend to do business together (though they can take other forms and the same advice here will still apply). However, when forming a partnership, there are a few common problems that can lead to ill will and even litigation.
No Operating Rules
When you first form a partnership, if you go see an attorney, they will have you put together and sign an operating agreement or a set of bylaws or other agreement about your partnership. These are the rules that govern major business decisions such as who can bind the business, how much authority they have without agreement from the other partners, what happens if someone wants out, and what happens if someone is disabled or dies. These rules should be fair to all parties and agreed on early on as they provide a roadmap for future problems.
At the beginning, however, when you and your partner are in agreement about pretty much everything, these rules often don’t seem like a big deal and signing them can fall by the wayside. Fast forward a few years (or even as short a time as a year) and people are no longer agreeing, wanting out of the business, or even getting divorced from their spouse who thinks they are entitled to a share of the business. The more lucrative the business, the riper grounds it is for litigation (though even businesses that are barely making a dime have been torn apart and stopped short of growth by partner litigation).
Unclear Expectations on Responsibilities
People enter into partnerships expecting things from each other. One person provides the funds, another the work, one person is a skilled salesman, another has the technology, and so forth. It’s important to spell out these expectations clearly so that each partner knows what the other expects from them. Without these, resentment and possibly litigation occurs. The money partner wants to know why the other partners are not doing their share of the work or believes the other partners are not doing with the money what they were supposed to do. Clear communication and clear expectations can often avoid these issues, but without a written understanding, litigation often results.
Money, where it comes from, how it’s managed, and how it’s spent, is often a source of disagreement. Partners need to be clear about how the money is being managed, how much income each partner makes, how much they are spending on the different costs associated with doing business, and other money issues. Lack of clarity or even disagreements on how money is managed can lead to one partner believing they’re owed more than they’ve received.
Part of a good set of operating procedures should include a mechanism by which disagreements are resolved. This could be by a vote of the members, but in partnerships where the vote could easily be split, there needs to be another mechanism in place. Not all disagreements need to go to litigation, and lawsuits can often be avoided if business owners seek the advice of skilled business attorneys at the time of starting their business.
Because our litigation work focuses primarily on business issues, including real estate businesses, our lawyers are familiar with handling a wide range of business issues and different resolution methods. To learn more, reach out to the Dunn Law Firm by calling (435) 628-5405 and set up a free consultation today.