Partnership Litigation Protection
Business relationships can become strained over poorly performing investments, property values, real estate development projects or financial stress very quickly. A once happy business partnership can become badly frayed and bring down long time business partners and friends. Financial pressure alone can break down the trust and collaboration that keeps partners together.
The top 5 lawsuit liability mistakes:
- Operating a business as a sole proprietorship or general partnership
- Holding real property in your own name
- Employee / HR policies
- Unprotected assets
- Projecting the appearance of wealth
The only proven method of protecting yourself from business liability and disputes is to protect your assets before it happens.
We observe a common list of mistakes that business owners make repeatedly that can cause or ultimately worsen a legal situation. Watching a client suffer through a legal battle unnecessarily is difficult, no matter how many times we’ve seen it. Specifically the outcomes for our clients could have been far better with proactive asset protection planning and by reducing of the likelihood of being sued by addressing the most common lawsuit drivers though proper legal and business management tactics.
Business Partnership Litigation Threat
Topping the list of business owner mistakes that lead to or greatly increase the likelihood of lawsuits is operating a business as a partnership. Partnerships are a common source of lawsuits and today we’re talking about lawsuits from within, partnership breakdown.
Litigation attorneys have heard every complaint there is about business partners… not working as hard, taking excessive loans from the business, all the way to breach of contract or fiduciary duty, or even fraud. A business partner dispute does not have to happen in the from a formal legal partnership, it can be two friends working together or even an oral business contract that makes two people partners. In nearly any business partnership, the partners owe each other various obligations and any litigation will involve partnership law. For example; in California the Revised Uniform Partnership Act governs business partnerships which is established in California Corporation Code.
A partnership means that two or more persons are engaged as co-owners of a for profit business. A person can mean an individual, corporation, company, another partnership or entity. The law does not require a formal written contract to substantiate a partnership, there are minimum partnership obligations set forth in the Uniform Partnership Act that will govern in the absence of a written contract, although written agreements can alter some of these obligations.
Partners have a fiduciary duty to the business relationship. Lawsuits often are invoked by a breach of this partnership obligation. In general this cause of action starts when a partner acts in bad faith towards other partners or takes advantage of an opportunity for personal gain. This could be actions that include hoarding clients, competing with the partnership, side dealing with vendors, branching off with another business or being involved in unfair financial activity.
Breach of contract is another partnership destroyer, whether this is written or an oral agreement. Anytime one party breaks a promise or basic duties of loyalty or good faith, it could be considered breach of contract. Lastly, fraud is the allegation on the most extreme end of the spectrum and involves alleged misrepresentation, deception or concealment.
Facts you should know about partnership litigation
Partnership disputes are very emotional, they can get ugly and become heated litigation pits. A lawsuit only worsens this through the detailed allegations of wrongdoing and/or betrayal. Partnership litigation involves feelings of broken trust and disloyalty, similar to a divorce. Before you even consider a legal battle consider what it is that you really want, figure out a game plan and consider the costs.
Partnership litigation is very expensive due to its heated nature and over litigation resulting in a costly fight. A reasonable approach is to make an objective analysis of the core dispute. A lawsuit could drain partnership funds and become financial cancer, ultimately destroying the business. When partnership disputes involve property, the financial situation is even more volatile.
A partnership dispute can become its own beast very quickly where the original complaint is often lost in bitter fighting. Oftentimes this kind of situation overshadows resolution by reasonable means. If you take time to create a reasonable outcome early on, you’re in a much better position to analyze offers and agree on the proper resolution strategy. When you have a game plan, it’s the difference between driving from Oregon to Florida with a map, or just “heading southeast”. A solid litigation plan also prevents attorneys from sidetracking into petty arguments costing you more in legal fees. The high cost of legal fees should play a role in how long and much you’re willing to argue about something. Pursing a victory over a point could increase the overall cost of your litigation, compromising in an area that saves you a long legal process may be more beneficial to your litigation plan.
If you find yourself in partnership litigation it would be wise to find out what are the true financial and legal issues rather than emotional and personal ones. Emotional responses will dilute your objective analysis and ability to implement a best strategy to a reasonable resolution.
How to avoid partnership litigation
This of course means that you are not participating in fraud, breaching a contract or being an opportunist in a business partnership – avoiding/minimizing partnership litigation is your first line of defense and the reasonable approach.
When disputes start around money, this can quickly be addressed through accounting. In order to shorten the process, you could conduct accounting on your own and explain what favors your case, while inviting the partner to do the same. By trying to reach an agreement early on you can circumvent a costly battle.
Early mediation is another reasonable strategy to avoid litigation. This is basically creating an agreement with three parties of legal assistance. Sometimes a quick resolution is one partner buying out the other. In this case a business appraisal is used to reach and agree upon a buy-out figure. This is an outcome designed when two partners are beyond continuing their agreement and are passed the point of no return and is a lawsuit avoidance maneuver.
Selling the business is also another way to avoid the break up litigation. Of course this means that the business is doing well and there is a willing buyer. Once a sale price is set, the business is sold, all of the business’ debt are paid off, and each partner is left with his and/or her share of what’s left over.
Partnership litigation can be a wrecking ball. There’s no need to worsen the situation. At the end of the day, your time and energy are better spent on growing your business, creating new projects and being available to your family. Not having a bitter war with an old business partner.