Every business form has its costs and benefits, and that’s especially true of partnerships. They offer simplicity without the double taxation that comes with incorporating. But there are drawbacks, most notably the potential for personal liability for business debts and liabilities. Before creating a business entity or switching from one to another, do your homework and know what you’re getting yourself into.
Here are potential legal challenges that come with a business partnership according to a partnership dispute lawyer:
- Unlimited liability: Each partner is liable for the business’s debts and obligations, even if incurred by other partners. This means your assets, like your house or car, could be at risk if the business cannot meet its financial obligations, even if it’s due to another partner’s actions or words you didn’t authorize or agree with
- Management and decision-making: Shared decision-making is good and bad. While collaboration can bring different perspectives, and partners can have their areas of expertise, it can also cause disagreements and conflicts. A well-defined partnership agreement outlining voting rights, how to resolve disputes, and exit strategies if the partners can’t get along is crucial to navigating these potential conflicts
- Sharing profits and losses: Determining how partners will share profits and losses. Partners should consider factors like capital contributions, time commitment, and expertise. Unclear profit-sharing arrangements can lead to resentment and disputes
- Partnership dissolution: Your partnerships may be fragile and can dissolve for various reasons, like the death or withdrawal of a partner, bankruptcy, or even irreconcilable differences. A clear exit strategy outlined in the partnership agreement helps manage the dissolution process, protecting the interests of all involved
- Intellectual property ownership: Ownership of business ideas, inventions, and other intellectual property created by partners must be clearly defined to avoid future disputes. Legal action may result if a partner leaves the business and uses its intellectual property in a new venture
- Fiduciary duties: Partners owe each other fiduciary obligations, such as acting in good faith and avoiding conflicts of interest. Breaching these duties can have legal and financial consequences
Take precautions to try to prevent these problems or lessen the harm if they occur. Our friends at Focus Law LA share some tips on how to protect yourself below:
- Partnership agreement: A well-thought-out and crafted partnership agreement addressing these and other issues is crucial for mitigating legal risks and protecting all the partners’ interests
- Seek legal counsel: Consult with a business lawyer experienced in partnership and business law who can help you understand the legal and financial complexities that come with business ownership
- Choose a different entity: If a primary concern is your possible personal liability, a corporation or limited liability corporation might be a better choice
There’s no free lunch when owning and running a business. You will encounter problems, maybe serious ones. But if you and the others involved with the business work with an experienced attorney, you can choose a business entity and create an ownership agreement to protect everyone’s interests. Contact a lawyer near you today for help.