3 Steps to Prevent Disastrous Partnership Disputes

Written by Wesley Henderson

September 14, 2020

rams locking heads

Partnerships can be great. They allow parties to take advantage of each other’s strengths and cover each other’s weaknesses. They allow people to pool together their resources, skills, and networks to achieve more together than they could have achieved individually. Partnerships also allow for a diversity of opinions and viewpoints.

While this diversity of opinion can spur great things, it can also create problems. This happens most often when partners haven’t communicated fully.

As a business owner, you need to build a foundation where disagreements can come and go without creating lasting problems. Follow these steps to help you and your business partners build a structure that can handle the roller coaster of business ownership.

Step 1: Talk About Money

Who contributes what?

When will salaries and distributions be paid?

When will you reinvest versus when will you distribute money?

Will a capital call be made, and under what circumstances? 

Figure all these issues out ASAP if you haven’t already.

Step 2: Formalize an Agreement Among Owners 

A partnership agreement (aka operating agreement for LLCs or shareholders agreement for corporations) is a document that spells out the nature of the partnership so that all partners are on the same page. It will include things like money and what happens to a partner’s stake in the company if they die or want to leave.

You can create a partnership agreement with or without an attorney. Not sure where to start? Here are 5 topics to address in your partnership agreement.   

Step 3: Define Duties

Who does what is often not included in the partnership or operating agreement, but it’s essential for everyone involved to know from the outset. With my clients, we will often create a nonbinding document to helps set those expectations. They find that this exercise is very beneficial to their business relationships and success. 

 Do what works best for everyone involved. That may not mean that everyone puts in the same amount of working hours. One partner may provide more money upfront, while another partner puts in more sweat equity. That’s fine. Just make sure everyone is clear on what their duties are. If it’s not clear, you should ask yourself whether a partnership is right for you in the first place.

Action Steps

  • Meet with your partners to talk about money, draw up a partnership/operating agreement, and define duties.
  • Or, make your life easier by downloading the templates from Drafted Legal where we walk you through all of your agreements.

 

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