Starting a business partnership can be an exciting time of planning and dreaming about your shared vision for the new venture. Even as you’re discussing the weaknesses in your business plan and threats in the market, it’s easy to ignore or shelf discussions about potential negative issues that may arise between the partners themselves. Noticeable differences aside, new business partners are not unlike a betrothed couple who prefers to focus on planning the big day, and their future wedded bliss rather than meeting with a lawyer to draw a prenuptial agreement.
It won’t surprise you to hear from an attorney that future planning is always a good idea, even if it’s tough. The practice of putting together a thoughtful plan helps you:
- Become comfortable with your business planning
- Protect your interests
- Understand your partner’s perspective and motivation
- Avoid future disputes
Common Business Disputes
Common disputes among partners may include feelings of unfair compensation, unequal workload, disparities in decision-making, or differing perspectives on the direction of the business. Many conflicts may be avoided if each partner fully buys into his or her responsibilities, compensation, and contribution. A carefully thought-out partnership agreement is the most effective way to prevent disputes among partners before they arise.
Your percentage ownership of the company is very important and may (depending on your agreement) dictate your:
- Voting Rights: The percentage of voting rights your ownership provides you
- Costs and Expenses: The costs and expenses you are responsible for paying for the organization
- Profits Distribution: The basis on which the profits of the organization are distributed (also determines taxes)
While voting rights, costs, and profits may often default to the percent ownership, each can be negotiated and agreed upon — depending on the partner’s and business needs — in the partnership agreement.
Assuming the partners work in the business, failing to define each partner’s management and job responsibilities can lead to potential conflict.
Imagine that you open a coffee shop with a partner. You are at the shop two hours before opening to oversee the brewing of the coffee and the baking of the pastries. You stay an hour after closing to ensure proper clean-up and prepare for the next day. Meanwhile, your partner breezes in when he pleases, seemingly only to criticize the employees and sample the pastries.
If you have a detailed partnership agreement that lays out the job and management responsibilities for each of you, this should be a non-issue. If, on the other hand, your business partner flagrantly defies what is laid out in the agreement, you have a legal document as a point of discussion with your partner. If that doesn’t work, you have a basis for legal proceedings.
However, because disagreements may arise even in the best partnership, it is also essential to have an agreed-upon plan laying out a plan for resolution, aka a resolution clause. Consider including a multi-layered approach in your partnership agreement, which typically includes arbitration and/or mediation.
- Arbitration – An arbitration clause is very common to resolve a dispute that arises from the existing partnership agreement. The clause often includes a timetable for resolution between the partners and a methodology for triggering the event, such as a written request. An arbitrator will review the facts and evidence before rendering a binding judgment to determine the outcome.
- Mediation – Mediation is much like arbitration with one key difference: a mediator works to have the parties resolve the dispute themselves. Mediation is a nonbinding process that often includes a third party who serves as an intermediary for each side of the dispute. They listen, review evidence, and make recommendations but do not deliver a binding judgment.
With a few resolution method exceptions, you are likely looking at litigation if you cannot resolve the issue through arbitration or mediation.
A good law firm is not just there when you need to sue or defend. A good firm can keep you out of court entirely. Bring in a firm you trust early to listen and learn about the business, the individual partners, and the roles you each will play. Let the experts help you develop a partnership agreement that best suits your business and personality. Focus on growing your business and what you do best while your law firm does what they do best. Then put it in your bylaws that you will review every year or two. Businesses and partnerships evolve. Takes the steps now to ensure that your legal documents evolve with you.
Finally, let’s set all the legal needs aside. When you start a business, it’s an exciting time. If you start it with friends, it can bring you closer together. But over time, the new excitement fades, and disputes will arise –it’s inevitable. Having a detailed partnership agreement that clearly defines roles, responsibilities, and percentages of rights and ownership can also help you and your partner(s) remain friends, as you move forwarIt’st’s, something rarely considered in the beginning but often reflected on with regret.
How Can a Trial Firm Like Deans Stepp Law Help with Your Partnership Agreement?
As trial attorneys, our main expertise is litigating or mediating partnership disputes. However, engaging a litigation firm to review your partnership agreement is a good investment for you and your business. Because we can anticipate many legal pitfalls, we can help you avoid a dispute altogether or mitigate potential damages in the case of litigation.