Breaking Up is Hard to Do . . . Business Partnership Issues

When I first meet with a group of prospective partners who have an idea and want to create a business, one of the questions I ask that often receives the most unique reaction is “what would you like to have in place if this partnership does not work out.”    Often times, the prospective partners, who are still in the afterglow of their new idea and the thought of a business venture, don’t want to discuss if it does not work between them.    They also do not want to discuss what to do if a personality issue or other conflict impacts the business and their chance to be successful.   However, in reality, it is essential that this discussion occur, and key decisions are made before the business is created.

Why is Preparing for Future Disputes Important?

During this initial discussion, I tell these prospective partners that there are three general categories of circumstance that will cause stress and conflict within a business partnership.   These are:

• Failure of the business

When the business lags or begins to fail, partners start to look to each other to place the blame.   Rarely does a business partner state “this is all my fault.”  Finger pointing begins in earnest between the individuals.

• Success of the business

Money and success often bring out the extremes in people’s personalities.  Conflicts escalate when the dollar amount is higher.   Rarely does a business partner state “I give all the credit to my other partner.”  Pride begins to impact the business.

• The business remains the same

Business, like nature in general, abhors the status quo.   Stagnancy is the precursor to problems with the business.  If you are not moving forward, you are actually moving backward.

After I discuss these three scenarios, which can impact any business, they realize that it does not matter the circumstances or good feelings of the moment, it is best to address the question now and have the proper preparations in place.

Strong Corporate Documents and Legal Framework

One of the keys to avoiding partnership issues and future disputes is to both define the business relationship between the partners, and the procedure that is in place when an issue occurs.   This is accomplished by the operating documents created at the initial corporate organization of the business.   These documents may include, a partnership agreement, an operating agreement, and specific corporate bylaws or policies enacted during the first corporate meetings.  

These operating documents provide the proper framework for the business, outlining authority and who is responsible for certain items.   They also will provide the framework to address issues that arise for the business and how disputes will be addressed.   When a business partnership has defined their expectations and individual responsibilities early, the odds of misunderstandings decrease because everyone knows their responsibility, everyone knows the procedure if there is a question, and everyone knows what they are entitled to if the business dissolves.

Even if there are no issues or disputes between the business partners, a strong corporate and legal framework will assist when unexpected contingencies occur.   For example, these documents will address what procedures are to be taken when there is a medical situation, disability, or death of a partner.   They can also provide the framework when an unexpected economic, nature disaster or other development occurs, which often requires decisive action in order for a business to survive.

Conclusion

Although it may seem counterintuitive to prepare for a partnership disputes before a business has begun, it is actually essential that this type of preparation occurs.   If fact, completing strong corporate documents and a legal framework to address these contingencies, increases the likelihood that these negative effects can be avoided.

© 2016 Matthew W. Harrison and Harrison Law, PLLC All Rights Reserved

This website and article have been prepared by Harrison Law, PLLC for informational purposes only and does not, and is not intended to, constitute legal or financial advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.