Starting a business can be exciting, rewarding, and oftentimes challenging, especially when working with a partner. While a business partnership brings camaraderie, additional perspective, and a second set of hands to split the work, sometimes disputes arise that can threaten the viability of the venture or your own personal interests. That's why it's important to have a strong foundation and predetermined ground rules before starting the venture. Some of the most common problems in business partnerships that can potentially be avoided with a solid contract include:
1. A lack of decision-making hierarchy:
Disagreements can arise over important issues such as the direction of the business, marketing strategies, and financial decisions. Without clear communication channels and agreed-upon processes for decision-making, partners can become frustrated and feel like their ideas are not being heard. For example, if one partner insists on making all the decisions without consulting the other, it can lead to resentment and conflicts. Partnership contracts should outline decision-making processes and responsibilities, thus minimizing the risk of disagreements because there are protocols to adhere to.
2. Unclear profit sharing guidelines:
If one partner feels like they are contributing more to the business than the other, tensions can arise over how profits should be split. Without a clear understanding of each partner's role and expectations, disputes can quickly escalate. If one partner contributes more capital to the business, they may feel entitled to a larger share of the profits. However, the other partner may argue that they are contributing more time and effort to the business. Understanding and outlining your role, responsibilities, and financial commitments by means of a contract can help to avoid potential conflicts.
3. Unbalanced workload and responsibilities:
Partners may have different ideas about how much work each should be doing. If one partner feels like they are doing all the work, or if one partner is not following through with what they said they'd do, you could run into missed deadlines, upset employees, vendors, or customers, or neglected/abandoned areas of the business. A proper partnership agreement will have duties and responsibilities spelled out clearly, so both parties understand what and how much work is theirs to complete.
4. Personal issues:
Personal conflicts between partners can also create tensions and disputes. Differences in management style, communication breakdowns, or incompatible personalities can all lead to disagreements. For example, if one partner is very detail-oriented while the other is more of a big-picture thinker, conflicts can arise over the direction of the business. Working with an attorney to draft a partnership agreement that includes conflict resolution processes can help partners resolve personal issues and keep the business on track.
5. Financial issues:
Disputes can arise over financial matters, such as how money is spent, how debts are handled, or how investments are made. Without clear guidelines and processes in place, partners can become frustrated and disagreements can escalate. If one partner wants to invest a large amount of money into the business while the other does not, it can lead to conflicts over the future direction of the business. Outlining financial responsibilities and expectations in a partnership agreement can help to minimize potential conflicts and/or lawsuits down the road.
6. Unclear exit strategy:
If one partner wants to leave the business, disagreements can arise over the valuation of the business and how the departing partner's share of the business should be handled. This is also true if one person cannot complete his/her duties, due to a medical emergency for example. One partner may feel entitled to a larger share of profits, one may feel like they should be able to retain ownership and relinquish their responsibilities, or one may wish to have their family listed as a beneficiary in the event of a disaster or tragedy. There are many scenarios that you may not have considered upon starting the business, so working with an attorney to draft an agreement that outlines exit strategies and scenarios can help you navigate the process more smoothly.
7. Breach of fiduciary duty:
A partner may breach their fiduciary duty by misappropriating funds, taking the best opportunities for themselves, or borrowing money or assets from the company. This may not seem like a huge deal when starting a small business by yourself, but in a partnership can cause significant harm to the business and damage the trust between partners. All strong partnership agreements will include fiduciary duty provisions that can help prevent breaches and protect the interests of all partners.
Protect Your Business, Your Interests, and Your Future
Disputes in business partnerships can be stressful and can threaten the success of the venture. By working with an experienced business attorney, you can draft a partnership agreement that outlines expectations, roles, and responsibilities, and addresses potential disputes. This can help you avoid conflicts and work through any issues that may arise more smoothly. If you are starting a new business partnership or are experiencing difficulties in your existing partnership, contact our law firm to schedule a consultation and learn how we can help you protect your interests and achieve your business goals.
