Legal Mistakes That Threaten the Success of Business Partnerships

27 March 2017
 Categories: Law, Blog

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Entering into a business partnership can be an ideal way to launch your business by integrating a mutual vision of the business, skill sets as well as funds from several sources. Yet a lot of business partnerships come to an end on a sour note. Often this is because the business partners commit or fail to plan for avoidable mistakes. By relying on the legal advice of a commercial lawyer when negotiating any business partnership, the majority of these blunders can be avoided. This article highlights a number of common legal blunders that often lead to the termination of business partnerships. 

Sharing capital

Typically, business partners contribute capital to the business based on the agreed contribution percentage. However, without a formal agreement, capital, as well as equity divides, might not be equal. Basically assuming that one of the partners will act in good faith is not enough to safeguard business interests. Ideally, business partners should enter into an agreement that specifies how equity and expenses are divided.

Not establishing an operating agreement

Failure to create an operating agreement at the start of the business partnership is another legal mistake. Basically, operating agreements specify how specific issues will be dealt with. Without such an agreement, disagreements may arise leading to litigation which may cripple or ruin the business. A commercial lawyer can help come up with an operating agreement that specifies the nitty gritty of the partnership agreement. Ideally, it serves to address potential bottlenecks before they crop up. For example, it can explain how the business partnership may be terminated in an amicable way or which of the partners will have the deciding vote. 

Shared liability

Business partners may have differing opinions regarding what assets to purchase for the business or the type of business ventures to explore. This may lead to disagreements if one of the partners feels that he or she is at the mercy of the decisions made by the other partner. Signing a limited partnership may help avoid this problem by safeguarding the partners from liability depending on the conduct or fiscal transactions made by general partners. 

Not envisaging the end

The right time to prepare for the end of a business partnership is at the onset when the parties involved have a mutual business vision and agree about the business foundation. The operating agreement can come in handy as it can include clauses concerning what will happen if one of the partners retires, wishes to leave the business, creates a new business, suffers serious disability or wishes to buy out the ownership shares of the other parties.