A partnership is the simplest and easiest way to form a business entity. It involves at least two people or companies working together to exploit business opportunities. Though partners should create a written ownership agreement so they know their rights and responsibilities, it’s not necessary.
There are advantages and disadvantages to operating a business partnership. Here are some according to a business partnership lawyer:
Pros
- Complementary skills and knowledge: A partner can bring expertise and experience that you lack, creating a well-rounded team that may be more successful than if each of you ran your own businesses
- Shared workload and decision-making: Having a partner allows you to delegate tasks and responsibilities, reducing stress and burnout. You can also benefit from different perspectives when making decisions
- Financial resources: Each partner can contribute capital to the business, which can help fund startup costs or expansion
- Potential tax benefits: Unlike corporations, partnerships offer pass-through taxation, so business profits or losses pass through to the individual partners’ tax returns. There’s not a separate tax on the business as well
Cons
- Disagreements and conflicts: Sharing decision-making authority can lead to disagreements about the business’ direction. If they’re not resolved, they could cause the company to grind to a halt
- Shared profits: You will split the business’s profits with your partner. If one partner feels they deserve more, it may come at the expense of the other, potentially causing a conflict
- Liability: Partners are generally liable for the business’s debts and obligations, even if you weren’t directly responsible. You could pay for your partner’s decisions even if you weren’t consulted in advance or disagreed with them
- Less control: You won’t have sole control over the business, and you’ll need to consider your partner’s input in decision-making
Ultimately, deciding whether to enter into a business partnership depends on your circumstances, risk tolerance, and the skills and experience you bring to the table as our friends at Focus Law LA can explain.
Legal Issues That Partners May Face If Disagreements Can’t Be Resolved
One of the cons is resolving disputes between partners. That, and some common legal issues that may happen with a partnership include:
- Breach of contract: A proper partnership agreement outlines the rights and responsibilities of each partner. Problems can arise if one or more partners violate the contract
- Fiduciary duty: Partners owe each other a duty of loyalty and good faith. This means they should act in the business’s best interests, not for personal gain. Self-dealing, withholding crucial information, or neglecting your responsibilities could be considered a breach of fiduciary duty
- Deadlock: If the partnership agreement lacks a clear process for breaking stalemates or a partner refuses to comply, disagreements can lead to your company’s paralysis. If a court gets involved, they may resolve the dispute, order one partner to buy out the other, or dissolve the business.
- Misappropriation of assets: If a partner steals or misuses company funds or property for personal gain, it’s a serious legal issue involving fiduciary duties and running the business. It may also result in criminal embezzlement or fraud charges
- Buyout: A partnership agreement should include a section for a partner selling their share of the business to other partners. Legal issues can arise if the agreement is unclear or partners disagree on how their share is evaluated
A clear, comprehensive partnership agreement should limit the damage a partner may inflict on a business, but it does not guarantee that disputes will not result in costly partnership litigation. If you are in a disagreement with your business partner, contact a lawyer near you for help.
