Partnership Pitfalls and How to Protect Yourself

So, you and your best friend have the next great business idea. You’ve agreed on the business plan, the marketing plan, and most of all, your desire to enter into a partnership together. What do you need to make this happen? The answer is a little more complicated than you’d like to think.

Every business, whether a corporation, partnership, or limited liability company should have a plan – and not just a business or a marketing plan. You need a written agreement setting forth who will own the business, how it will operate and providing a way to resolve disputes. Without an agreement, you run the risk of very expensive and contentious litigation. Impossible, you say? You and your best friend haven’t had an argument since the seventh grade? Unfortunately, not in today’s world. While you and your best friend may never have a disagreement during your entire relationship, what happens when one of you wants to retire? Dies? Get divorced  The cost to have your attorney prepare an agreement to address these issues will be an insignificant cost if it prevents or limits  disputes in the future.

There are some areas that lead to disputes more often than others, and therefore should be addressed by every partnership agreement. 

Death – What happens if a partner dies? Can your partner’s heirs inherit your dear departed partner’s interest in the partnership? Does that mean the spouse, children or other recipient of the decedent’s partnership interest now have a vote in running the business, or do your interests go to each other if one dies? What if the beneficiaries of the decedent’s partnership interest do not have an interest in the partnership and demand a buy-out? What if the decedent leaves his partnership interest to his girlfriend instead of his son, who has experience in the partnership?

Disability – what happens if a partner becomes disabled? This can have serious consequences in a service related partnership, or one that relies on the partners’ expertise, like physician and attorney partnerships. Does disability trigger a buy-out? What if the success of the business is dependent on that now disabled partner?

Divorce – While it may be unlikely that a judge would award a divorcing spouse an interest in a professional service corporation, like a legal, medical or dental practice, what happens to an entity that owns real estate or sells widgets? Not many people want to be in a partnership with their best friend AND their best friend’s ex-spouse.  What if your partner IS now your ex-spouse? 

Sales to Third Parties – Imagine your business is wildly successful.  One of you wants to sell to a venture capital group, the other wants to continue in the business. Can either of you sell your interest? Can one of you drag the other along in the sale? Do you want a right of first refusal?  These must be in writing and agreed to by all the partners to be enforceable.

Disagreements – Many lawsuits between partners can be avoided if the partnership agreement states how are disagreements are resolved. Or perhaps more importantly, how to resolve a deadlock. This is essential in businesses owned equally by two parties. For some partnerships, the absence of a solid agreement on how to resolve a deadlock could lead to an expensive legal process known as judicial dissolution.

Non-Compete/Confidentiality Clauses –If the partnership dissolves, or one partner is bought out, can they open a competing business next door? An iron-clad non-compete clause can ensure that this doesn’t happen.

The Florida Statutes can fill in the gaps if a partnership agreement does not exist or does not address all important issues. However, an actual agreement can address these issues and many more, benefiting both the entity and its partners by providing a clear understanding of how the partnership will operate when presented with specific situations. The time for the partners to enter such an agreement is when they are starting their new business venture, when everyone is in agreement, everyone is hopeful for the business’ future and the parties are working together. If you wait until there’s a problem, you’ve waited too long!

By Jennifer Cates Lester and Star Sansone, Partners at Dell Salter, Attorneys at Law

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