What Are Common Causes Of Partnership Disputes?
So you want to enter into a partnership with someone else, and start your business idea. This could be a good idea—however, unfortunately, many partnerships end up in partnership disputes. What are the most common causes of disputes when people decide to form a partnership?
Not Having a Partnership Agreement – Partnership agreements set forth the rights of the parties from the outset. Your agreement will deal with formalities, voting, responsibilities, who is liable for debts, and who gets what from any profits. The partnership agreement is the backbone of your partnership, and having one will spell out all partners’ rights from the beginning, avoiding problems down the road.
Your agreement is also the first thing a court will look at if your dispute ends up in court.
Breaches of Fiduciary Duty – As a partner, you are a fiduciary in your partnership. Purposely or not, many people do things to breach this duty. For example, partners may work with competitors, or divert partnership funds to personal means. This gives other partners the right to sue you for breach of your fiduciary duty to the partnership.
Duties – A partnership takes work, and often, people partner up to take advantage of each other’s individual strengths. The parties should know from the outset what is expected of them—and what will happen if someone is not pulling their weight.
Investments/Capital – You may have dealt with who will be liable for debts the partnership incurs. But what if the partnership needs more capital? Will partners be required to contribute? And if they do contribute, what are the repayment terms (which brings up another question as to whether a partner’s money is a loan, to be paid back, or an investment)?
Stalemates – Many partnerships have 2 or 4 people—an even number. How will your partnership break a tie vote? What do you do when there is a stalemate? You can certainly have people who act as tiebreakers, perhaps each in their own area of expertise. Alternatively, you can agree to submit to mediation, or another form of dispute resolution.
Perpetuity – How long will the partnership last? In some cases, partners may want to continue on, indefinitely. Other partners may see the venture as a “per project” deal, where the partnership is over as soon as the current project concludes. What will you do when some partners want to wrap up and go home, and others don’t?
Involuntary Removal – Some things in life may cause a partner to have to withdraw from a partnership. For example, a partner may declare personal bankruptcy, and thus lose his or her part in the partnership. A partner could die, or lose a share of the partnership in a divorce. How will your partnership deal with a situation where a partner can no longer, legally, be associated with the partnership?
Call the West Palm Beach partnership dispute attorneys at Pike & Lustig today to help your business with its business contracts and agreements.