Starting a business with a partner or a group of people can be an exciting endeavor, but it can also lead to stressful situations when one or more of your partners does not meet the terms of the partnership agreement. Ideally, the business will have a partnership or operating agreement that was negotiated and agreed upon when the business was started. Unfortunately, often times at the beginning of a relationship, the owners tend to gloss over or ignore the details of what happens if someone does not live up to their obligations. If a partner does not abide by the terms set by the partnership agreement, that person is in breach of the agreement, or in breach of contract. If you are dealing with one or multiple partners who have breached a partnership or operating agreement, you need to know what options are available. You want to resolve the dispute without litigation if that is possible. In some cases, you will need to seek an order to prevent a partner from taking business, clients or trade secrets. In either case, you need experienced counsel to help you navigate through the challenges of a partnership breakup. The business law attorneys at Byrnes, O’Hern, & Heugle Law Firm have experience dealing with partnership disputes.
What is a Partnership?
In a legal sense, a partnership is the most basic structure available for two or more people who are interested in starting a business together. According to the US Small Business Administration, if two or more people want to enter into a business partnership they must choose between two options, a limited partnership (LP), or a limited liability partnership (LLP).
In a limited partnership, or LP, one partner typically has unlimited liability but greater control over the company, while the other partner(s) have limited liability but less control. On the other hand, a limited liability partnership, or LLP, is a structure in which all the partners have the same liability and the same general control of the business.
What Is Typically Included in a Partnership Agreement?
Whether your partnership is an LP or LLP should be clearly stated in the partnership agreement. As the partnership agreement will be the primary tool for handling breaches of contract, it is important for everything to be laid out clearly. If the partnership agreement is vague or ambiguous, you open the door to partners who may want to exist without living up to their obligations.
At the very minimum, the following elements should be included in a partnership agreement:
- Each partner’s financial contributions
- How the partners will split the profits
- What will happen if one partner leaves the business, becomes disabled, or dies?
- What will happen if you need to close the business?
- What will happen in the event of bankruptcy?
- How partners will share in decision-making
- How partners will resolve disputes (through mediation, arbitration, lawsuits, etc.)
- Liquidated damages in the event of a partnership breach
- Dissolution of the business.
While partnership agreements do not need to be in writing, it is extremely helpful to have a written agreement should issues arise.
How to Handle a Breach of a Partnership Agreement
Many partnership agreements will include an outline of what should be done in the event where one partner is in breach of contract. In cases where the partnership agreement requires mediation or arbitration, speaking to an experienced business law attorney before moving forward is always a good idea.
Some partnership agreements can include terms that clearly state that one partner is unable to bring a lawsuit against another partner for losses. Others might stipulate that you can seek liquidated damages and the amount available. It all depends on what was laid out in the initial agreement.
If your partnership agreement does not specifically address what should be done in the event of a dispute or a breach, then you may have one of several options available to you with the help of a business lawyer:
- Expel the partner from the partnership
- File a lawsuit against the partner for the contract breach
- Seek liquidated damages from the partner
- Negotiate a settlement.
The above options need not be mutually exclusive. For example, you could potentially expel the partner from the business and file a lawsuit against that partner. If the terms of your partnership agreement allow, you also may be able to seek liquidated damages for actual or anticipated damages in your lawsuit.
Creating a Partnership Agreement With Help From a Business Law Attorney
If you want to avoid complicated litigation after a breach of contract, getting an experienced business law attorney to help you draft a solid agreement can help prevent future headaches.
There are many legal scenarios that will force a business to hire an attorney, but there are also many things that can be done to prevent these types of scenarios from happening. Consulting with a business lawyer can help aid in prevention, and by conducting your own research on topics like business contracts and disputes it will be much easier to implement precautions into your business and prevent issues from occurring.