Legal Guide

How to Protect yourself in a Business Partnership

by Bhavya Choudhary · 4 min read

how to protect yourself in a business partnership

Business partners typically get into relationships too quickly, without enough conversation, as a matter of convenience, through rose-colored glasses, and without seeking legal counsel. Starting a business might sound fascinating but it is also important to know ‘how to protect yourself in a business partnership’. Business Partnership conflicts are commonly referred to as “business divorce” for a reason. Similar to a divorce, this form of litigation is nearly always expensive, time-consuming, controversial, and emotionally draining. It’s also entirely preventable, by knowing how to protect yourself in a business partnership.

It is a mistake to fail to document the agreement in the hopes that everything would work out and that you will always “be fair” to one another. It is not the time to discuss the terms of a sale after a relationship has soured. On the back end, a little amount of labor upfront may save tens of thousands of dollars and years of frustration. So, if nothing else, talk to your business partners about these topics:

Business Partnership Deed

A business partnership is formed when two or more people agree to work together. It’s worth noting that this type of arrangement can only come about as a result of a contract, not because of a person’s status. This is what distinguishes a business partnership from a Hindu Undivided Family doing family business. The reason for this is that this type of alliance can only be formed with mutual consent. As a result, a business partnership is both voluntary and contractual in character.

An express agreement will result in a business partnership deed. It might also be inferred from the partners’ Partnership Act and a consistent course of behavior, both of which demonstrate a shared understanding. This agreement might be oral or written.

  1. Roles and Decision-

As a first step, the partners should consult their attorneys and tax advisors to determine the optimum business structure for them. A limited liability business partnership (LLP) is typically preferred since it protects limited partners from the general partner’s conduct. Partners should also take care to outline what duties each partner will play early on, including allocating managerial tasks if necessary, defining goals or benchmarks, and determining how decisions will be made, especially when the matter is critical and there is no consensus.

  1. Capital Investments.

 Determine the sources of capital and the circumstances under which you will compel the firm to seek outside investment or ask the owners to invest their own money. This relationship should be recorded when one partner contributes cash and the other offers sweat equity. The idea is to make each partner’s expectations as clear as possible.

  1. Compensation.

 The majority of partners are fast to agree on ownership shares. However, they frequently overlook other important terms relating to their interests, such as vesting schedules (common in start-ups), stock reservations for investors or future employees, equity adjustments, profit and loss allocations (for example, whether profits and losses will be proportionate to equity or divided into equal shares), designation of business assets, and even a definition of profits, especially as it relates to calculations for reinvestment and partner remuneration.

  1. Dissolution of partnership deed.

 When one partner wants to sell the firm or cash out and the other partners don’t, there are a lot of disagreements. As a result, it is critical that all business partnership agreements take into account the criteria that lead to the termination of the business connection, as well as dissolution of the partnership deed, when both parties are on the same page, prepared to work, and reasonable. Because accidents may happen to anybody, young or old, partners should think about the impact of the business partnership interest in the case of a partner’s death or incapacity. A right of first refusal and a buy-sell agreement may be appropriate in such cases. Depending on the industry, further procedures for forcing an exit may be required. For example, in a restaurant or bar, partners or members typically agree to a buy-sell provision triggered by evidence of alcohol or drug problems because these issues can make it difficult for the restaurant or bar to obtain or renew a liquor license, which can have a negative impact on its profitability.

  1. Dispute settlement.

Due to the high expense and time commitment of litigation, and the fact that the majority of disagreements involve payments owed to a leaving partner, partners should consider ways to break the impasse and alternate dispute resolution methods. For example, the partners could agree to early mediation or arbitration clauses, pre-select a forensic accountant (or a firm) to determine valuation whenever the need arises so that they don’t have to fight about valuation later or assign formulas to determine ownership interests to avoid the need for a forensic accountant.

The above-mentioned are the ways on how to protect yourself in a business partnership. Therefore, it must be kept in mind while protecting yourself in a business partnership.

Conclusion

The blog states the points as to how to protect yourself in a business partnership. While this is by no means a detailed list, it does illustrate the most prevalent concerns that arise from business partnership disagreements. Getting ahead of these problems now might save you a lot of grief later. Before creating or entering into any agreement, you should always contact a professional lawyer who is licensed and knowledgeable in your industry.

There are a few common disputes that arise in a business partnership. Know how to protect Yourself in a business partnership.

Bhavya Choudhary

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Bhavya Choudhary

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