What are Common Risks of Forming a Business Partnership?

What are Common Risks of Forming a Business Partnership?

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Forming a business is a big step. For many people, going it alone is too scary of a concept and, therefore, may prompt them to bring in a partner. While going into business with your best friend, peer or significant other may sound like a wonderful idea, the truth is you may not be able to count on that relationship if, and when, times get tough.

Risks of Informal Business Partnerships

Partnerships are the most common and most simple type of business arrangement. While they may be simple and common, they come with a specific set of disadvantages. Many business partnerships are unwritten agreements between friends. This informal type of arrangements opens partners up to liability. Unless the business partnership is in the form of a limited liability corporation, the partners can be on the hook for liabilities and debts associated with the business in the event it becomes insolvent. Each partner’s personal assets can be used to cover business expenses.

Perhaps one of the biggest drawbacks to an informal business partnership is the vagueness of each partner’s duties and authority. Without a written agreement outlining duties, responsibilities and authorities, partners may find it difficult to delegate fairly.

Some business partnerships involve two family members. In such cases, business partners should treat each other as business partners and refrain from speaking about family matters while they are in the office. If they are spouses, they may choose to discuss business issues only while they are in the office and refrain from speaking about business while they are home or in front of the children.

Furthermore, informal business partnerships may open individuals up to unnecessary liabilities and litigation. The lack of a clear hierarchy of authority, the inability to transfer ownership and the unnecessary exposure to business-related debts, can make a business partnership one of the most difficult business arrangements to control.

Avoiding Litigation Risks in a Business Partnership

Unfortunately, a business partnership can end in business litigation due to certain factors. It is important for business owners to follow some simple rules that can help them maintain a healthy business partnership.

Business partners should also prepare for the possibility of their ideas clashing, which is not unusual. One partner may be focused on the details of the business while the other partner is more involved in finances. Each partner may have a different view about running the business and it is important for both partners to remain committed to their cause-making the business successful. As partners, they can create a strategy that allows them to showcase their talents, interests, personalities and core values. By doing so, each partner can communicate more effectively.

Determine if the issue is worth a battle

Some issues aren’t worth fighting over. If there are minor disagreements that aren’t going to harm the company, it might be best to let your business partner have their way.

Think about how the solution your partner is suggesting will impact the business and you can go from there. If you decide that you need to stand up for what you think is the better solution, be prepared to show why it’s the best.

Discuss the matter away from employees

Company employees don’t need to know that there’s a disagreement between the owners unless it’s something that they are directly impacted by while you’re working out a solution. If you have an office with a door, you might be able to talk things over privately. Going out for a business lunch or meeting away from the business might also be a good way to resolve things.

Get help to find resolution

In the event that both partners want to end the business, they may choose to liquidate the assets and divide the proceeds. If one partner chooses to end the partnership, that person should be entitled to a certain percentage of the company’s assets. If a partnership ends in business litigation, which often happens, it may be a good idea to speak with a legal professional. Both parties may also settle the case out of court through alternative methods, such as mediation.

A good option for owners is to settle disputes through arbitration or mediation, as it can help to cut down on costs or achieve a more favorable settlement. There are also several legal matters that could arise during the dispute that will need to be addressed.

For example, it is important for business owners to safeguard confidentiality and intellectual property including patents, confidentiality agreements, copyrights and trademarks. Business owners also should review contracts before signing them. A minor gap can result in a dispute and seemingly endless litigation. Lastly, it is important for a business to comply with corporation law requirements. A corporate record must show that the company is operating separately from the owner, while still complying with the mandates of the corporate board and other requirements.

If the dispute was because of a legal or financial concern, you may have to move beyond mediation. Instances of embezzlement, for example, would require that you contact law enforcement to investigate the situation.

Being able to work through the disagreements you have with your business partner can strengthen your business relationship and your company. Trying to get this done without disrupting the business is a good goal, but be prepared to take further action if necessary. If you have any questions about partnership disputes, please contact the law firm of Ciancio Ciancio Brown, P.C. at 303-451-0300.