Bringing on a business partner can either be a blessing or a curse for your new venture. The outcome is definitely not one you want to leave to chance. Rather, consider the adage, “Prepare for the worst, but hope for the best.” But your potential partner is an old friend, a colleague, or a family member; they wouldn’t do anything detrimental to the business, right? In my experience, partner disputes in small businesses are all too common. But these tips can help you protect yourself beforehand to avoid costly litigation with your business partner down the road.

Business Partner Disputes Tend To Follow The Money

There are typically two times when you have disputes in business: when there’s no money and when you have money. In the case of the former, partners may fight about how to keep the business going or increase sales. In the case of the latter, it’s often a situation where one partner is doing more of the work, but you’re both making the same amount of money, creating animosity.

Another even more serious issue occurs when one partner does something criminal. For example, if you find out your partner is stealing from the business, they may get convicted for the crime, but if you don’t have the proper contract protections in place, you may still have to pay them or buy them out. Not only is that a sucker punch emotionally, but it could also put you in a cash crunch as well.

That’s why outlining the partnership rules before you actually partner is a must!

What To Consider When Drafting Business Partnership Agreements

Realistically, you won’t be able to draft a partnership agreement contract that covers every situation in which a partner could be detrimental to your business. Still, you can, at a minimum, protect yourself from the big issues I’ve mentioned above with these general tips.

1. Do Your Due Diligence

One of the best ways to protect yourself and your small business is to avoid surprises. Regardless of how long you’ve known your potential business partner or their reputation, you need to check them out. A background check can tell you if they have any past issues (legal, personal, debt, etc.) that could affect your business or that generally make you wary of trusting them. If they have an issue with you looking into their past, that’s a red flag.

2. Decide The Type Of Partnership

Different states have specific laws when it comes to the formation and dissolution of business partnerships. These laws also outline the responsibilities of each partner. Generally, there are three forms of business partnerships:

• General Partnership – The most straightforward business partnership; here, partners are required to open the business together and divide all duties and responsibilities equally.Limited Liability Partnership (LLP) – This business partnership is best for partners who want personal legal protection for their small business, meaning the liabilities of the business cannot be extended to the partners.
• Limited Partnership – In this business partnership, one partner invests financially but is not actively involved in the day-to-day operations.

3. Put Procedures In Place To Dissolve The Partnership

This is where you’ll draw a line in the sand (or contract in this case) regarding what’s acceptable (or unacceptable) behavior in the partnership. Unacceptable behavior could be anything from a partner not pulling their weight to professional misconduct to criminal activity. Then outline the partnership dissolution procedure, which includes the rights and responsibilities of each partner as well as the process of selling the partner’s assets, paying debts, and distributing money.

4. Talk To A Lawyer

This may be the most important step you take in protecting yourself when bringing on a partner in your small business because you can often influence the outcome before a dispute even arises. For one thing, the party who sets the terms of the partnership can have a significant advantage if the other party breaches the agreement, from controlling where disputes can be litigated to whether a jury can be utilized in the dispute to determining the types of damages that can be recovered. Second, drafting a partnership agreement with an eye toward how it can be litigated can also give you an advantage. The right lawyer can make sure you are covered.

A Business Law Practice With Transactional And Litigation Expertise

Attorney Kline Preston has almost thirty years of experience practicing law in both domestic and international contexts, including business formation, restructuring, contracts, and litigating disputes. Unlike many others in my field, I’ve also founded and run businesses myself, which means I not only know the law but also how it’s applied. That expertise benefits my clients, especially when creating partnership agreements, as I understand the rules of evidence and the rules of contract construction that give guidance to the court on how to interpret and enforce them in your favor.

For advice or detailed guidance on partnership agreements for small businesses or how to navigate a business dispute, contact Kline Preston today.

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