Partnerships Are Risky Ventures
All things being equal, partnerships are the riskiest form of business entity. Why? First, a partner can be held personally liable for the actions and omissions of his or partners. Second, similar to marriage statistics, the breakup rate for partnerships is exceedingly high. By some estimates, over 75% of partnership fail. Third, the ease of forming a partnership may leave an unwary businessperson in a partnership without understanding the legal obligations that come with it. Two or more friends working together under an oral agreement makes a legally recognized partnership. There is no legal requirement for a written agreement.
Good Partnerships Have Advantages
Notwithstanding the risks of operating as a partnership, it remains one of the most common forms of business enterprises. And they are not without their advantages. They are nearly equivalent to sole proprietorships in ease of startup and in covering associated costs. They have the advantage over sole proprietorships just in terms of numbers – more partners may have access to potential capital to fund the business with personal assets. And as the saying goes, “two heads are better than one.” Having a friend to collaborate with on common goals and interests can make work more enjoyable.
Unfortunately, disputes can arise. And like a marriage, when the relationship breaks down, it can get ugly and emotional. They can involve feelings of resentment, broken trust, and disloyalty.
Partners Owe Each Other Fiduciary Duties
Whether or not the partners are aware of it, they owe each other legal fiduciary duties to the business relationship. Often partnership disputes originate from some breach of these duties. Examples include: self-dealing at the expense of the business, bad faith towards other partners, misrepresentations, deception, and concealment.
Methods to Resolve Partnership Disputes
>> Talk it Out
Often misunderstandings arise that can be quickly resolved if you set aside time to communicate. Some partnerships can become stove-piped in areas of responsibilities, with little communication. This can lead to resentment if one partner considers his or her contributions exceed his or her return in the partnership compensation. As a dispute arises, set aside a specific time to talk about it. Sometimes the best time to do this is after the workday has concluded and you are free from distractions.
>> Mediation
If you are unable to resolve the problem yourself, consider using an independent party to mediate. Early mediation is another reasonable strategy to avoid litigation. Involving a mediator, especially one familiar with the law and your industry, may help both sides appreciate the other’s position in a non-confrontational way. Skilled mediators can also help keep emotions in check and allow the partners to focus on a solution.
>> Ending the Partnership
If a resolution cannot be reached, it may be time to work on an amicable separation. If the partners do not share a common vision regarding the future of the business, terminating the partnership may be your only option. While this is not what you expected when you began working together, without the ability to resolve differences and to work together, moving forward without your partner(s) may be your only option. As an alternative you, you may consider selling the partnership, or allowing one or more partners to buy out the other(s).
>> Have a Partnership Agreement
Having a written partnership agreement may be your first line of defense. If during the excitement of starting a business, or the desire to save time and money, made you skip this important step, it may be a way to resolve your current disputes and prevent future ones. If you are considering self-help in doing this, it’s not advisable. This is especially true if you are currently in the throes of a dispute. Having an experienced attorney guide you through the process has many advantages. First, each business is different and each individual’s contributions to that business can be equally unique. Attempting to revise a generic partnership agreement may leave you with hours of wasted effort and an unusable product. Second, a poorly drafted partnership agreement can lead to litigation in the future. Partnership agreements require the application of your situation to the law. You and your partner(s) are the subject matter experts on the first. You are likely not equipped to handle the second.
>> Litigation/Dispute Resolution
Sometimes reaching an amicable resolution to your disagreements is not possible. You may be so far apart that attempting to resolve the matter yourself will only make things worse. Your partner’s conduct may have become so outrageous that attempting lesser methods of resolving your dispute only places you and your personal assets at greater risk. It is often the case that immediately involving an experienced business litigation attorney can help you prevent further damage to your business and your reputation.
Takeaway
Early involvement of an experienced business law attorney as potential disputes develop can help you map out the advantages and disadvantages to your situation and provide you with your options. Contact CASHMAN LAW today for a free consultation to see how we might help you both protect yourself and foster positive business relationships.
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