The old saying goes, “An ounce of prevention is worth a pound of cure.” Both start-ups and established companies can push partnerships to the breaking point. Just like marriages, all partnerships can come to an end. Recognizing the perils and pitfalls of business partnerships before disputes occur is as important as the profit margin itself.
What are the common disputes among business partners?
- Embezzlement: Partners often have access to accounts, petty cash and operating capital. When internal theft occurs, it can not only be an issue for dispute, but it can result in both civil and criminal cases.
- Trade secrets: Partners often have access to sensitive information that could be damaging if it, intentionally or unintentionally, falls into the wrong hands. Sometimes, trade secrets are obtained without permission and used long after the partnership has ended.
- Breach of contract: Partnership agreements can be written or verbal. When either partner fails to uphold their end of the contract, then disputes are sure to follow.
- Financial responsibility: Essentially, partnerships are formed for collaboration and support. When partners do not fulfill their financial responsibility to either client or company, the resulting liability often leads to dispute.
- Minority/Majority partners: Not all partnerships are equal. Some partnerships have a minority partner and/or a majority partner. This inequality can lead to disputes over profit-sharing, decision-making and overall vision for the future of the company.
- Non-compete clauses: Many partnership agreements include a non-compete clause that affectively prohibits partners from acting in any way that positions them as competition. Violating a non-compete clause is potentially damaging to the partnership and the company itself.
The partnership agreement is the perfect time to clearly define expectations, such as:
- Individual partner contributions
- Partners’ shares of profits and losses
- Authority and decision-making limits
- How to resolve partner disputes
- New partners, and death or removal of a partner
Unfortunately, not all disputes are avoidable. The best way to avoid partnership disputes is a properly written partnership agreement. This is why it is important to have partnership contracts analyzed by experienced and impartial legal review.