Partnerships, perhaps more than any other type of business structure, rely on the personal relationships between the partners. Good relationships typically lead to smoother business operations, while relationships fraught with mistrust and disputes will impact the business in a much more negative way. Partners often embark on a business relationship with someone based solely on the fact that they have a good personal relationship. Sometimes, it is too late when one or both partners realize they do not share the same business philosophies. It is critical that anyone entering into a partnership understands that disputes may arise, and how to avoid them early on.

Partnership Agreements Help Avoid Disputes

One of the best ways to avoid future disputes is to have a partnership agreement in place early on in the relationship, preferably before even starting the business. A partnership agreement is certainly a must-have before either partner starts investing any significant amounts of money into the venture. At the bare minimum, a partnership agreement should include:

  • The division of ownership among the partners

  • How much capital each partner is contributing

  • How future capital contributions will be handled, if necessary

  • The obligations of each partner

  • The compensation of each partner, and how it will be distributed

  • The procedure for making decisions

  • The procedure for resolving conflicts

  • How to handle a situation when one partner wants to leave the business 

  • Circumstances that could lead to terminating the partnership

  • The process for dissolution

It is always best to speak to a business lawyer that can draft a partnership agreement for you. While you can find boilerplate templates online for these contracts, no two partnerships are exactly the same and it is unlikely that a template will fully cover the unique needs of your business. While no one wants to think about the worst-case scenario when entering into a business with someone they trust and want to do business with, it is best to plan for these unforeseen circumstances now.

Some people are surprised to learn that disputes arise between them and their future partners while drafting the contract. This is one reason it is so important to draft a partnership agreement early. You will have to cover a lot of ground, and try to foresee many things that may happen in the future and that you may not have yet considered. When you and your potential partners cannot mutually agree on the terms of the partnership agreement, it is best to walk away now rather than deal with bigger challenges in the future. As with anything in business, no deal is always better than a bad deal.

Creating Clearly Defined Roles

When forming a business with two or more partners, it is natural to assume that each partner has an interest in the new business venture. However, that does not mean that each partner should have the same role in the business. 

Even when a business is divided equally, no one partner can run the entire business. It is essential that before operations begin, each partner determines what role they will have, as well as the level of authority they will have, as this will greatly help prevent disputes in the future. For example, one partner may be better suited to run the daily operations of the business, while the other may have more experience with bookkeeping. This makes for a great partnership because each party will complement the other and bring expertise and knowledge to each partner in the business.

It is critical that the role and responsibilities of each partner is clearly defined within the partnership agreement. There is no such thing as including too much detail within a partnership agreement. Ambiguous and vague language within a partnership agreement makes it likely that disputes will arise in the future, and that those disputes may lead to costly and time-consuming litigation.

Addressing Disputes

Even with the best partnership agreement in place, and the best of relationships between the partners within the business, it is almost guaranteed that disputes will arise. No two people will always agree on everything, and this holds true in business, as well, when partners will likely feel passionately about how certain things should be done.

When a dispute arises, even when that dispute only involves one partner that does not agree on how things are being handled, the best course of action is to address it honestly, openly, and as early as possible. Allowing issues to fester will only lead to increased disputes, as the issues can become easily confused and compounded. After addressing the potential dispute, all partners can then look to the partnership agreement to determine how to settle them. Perhaps the contract outlines the issue involved and which partner is responsible for overseeing it. That alone could be enough to resolve the dispute. 

If the agreement is not so clear on a specific dispute, it should at least outline how disputes are to be handled. Partners may have to enter into mediation, or another form of alternative dispute resolution, prior to entering litigation or dissolving the partnership. When mediation or another form of dispute resolution is not enough to bring the partners into agreement, it is then important that each partner retain the help of their own partnership dispute lawyer. Litigation is never an easy process and an experienced attorney will help partners through it and perhaps even bring them to an agreement.

Our California Partnership Dispute Lawyer can Help

Partnership disputes are extremely detrimental to your business, but there are options available. At Klein Law, our experienced Santa Monica partnership dispute lawyer can help you draft an agreement that will avoid disputes in the future. When it is too late to draft a new agreement and you and your partners are already in a dispute, we can also help resolve them, which may not involve dissolving the partnership entirely. Call us today at (310) 295-2261 to schedule a meeting and to learn more about how we can help.