Partnership litigation asset protection means several things. First, is is protect yourself if your partner creates personal liability exposure. Second, it means protecting yourself if your partner steals from the company. Third, it means protecting your assets should the company not pay its debts.
The breakup rate for marriages is around 45%. For business partnerships, on the other hand, it is 85%. Business relationships can become strained over poorly performing investments, property values, real estate development projects or economic downturns very quickly. For example, one partner does more work than the other, contributes more money, has more talent. As a result, once happy business partnership relations can become badly frayed and bring down long time business partners and friends. Moreover, financial pressure alone can break down the trust and collaboration that keeps partners together. Thus, the need for partnership litigation asset protection.
A partnership is the most dangerous form of business ownership. Let’s say you own a small business partnership. You are on vacation in Hawaii. Your partner spills water and a customer trips and falls. Even though you were not there that lawsuit can take your assets. Likewise, it can take your partner’s assets that the assets of the business. Partnerships multiply a legal liability. That said, here are the top five lawsuit liability mistakes.
Top 5 Partnership Lawsuit Liability Mistakes
- Operating a business as a sole proprietorship or general partnership
- Holding real property in your own name
- Unclear 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 a lawsuit happens.
We observe a common list of mistakes that business owners make repeatedly that can cause or ultimately fuel a legal fire. Watching a client suffer through a legal battle unnecessarily is difficult. That is the case 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. They could have reduced the likelihood of being sued by addressing the most common lawsuit drivers. The keys are to activate an asset protection strategy and to employ 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. Here we are talking about lawsuits from within the organization.
Litigation attorneys have heard every complaint there is about business partners. One partner not working as hard as the other. A partner taking excessive loans from the business. Breach of contract or fiduciary duty. Downright 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. Litigation regarding this business type will involve partnership law. For example, in California the Revised Uniform Partnership Act governs business partnerships. It is a part of the California Corporation Code.
Definition and Law
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 other entity. The law does not require a formal written contract to substantiate a partnership. The Uniform Partnership Act sets forth minimum partnership obligations that governs 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. As such, partners often initiate business lawsuits because of a breach of this 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 include hoarding clients, competing with the partnership, side dealing with vendors, branching off with another business or involvement in unfair financial activity.
Breach of contract is another partnership destroyer. This is the case whether the agreement is written or oral. Thus, anytime one party breaks a promise or basic duties of loyalty or good faith, the law can consider it a breach of contract. Lastly, fraud is the allegation on the most extreme end of the spectrum. It involves alleged misrepresentation, deception or concealment.
Partnership Litigation Facts
Partnership disputes are very emotional. As a result, they can get ugly and become heated litigation pits. A lawsuit only digs into the wound through the detailed allegations of wrongdoing and/or betrayal. Partnership litigation involves feelings of broken trust and disloyalty. It is similar to a divorce. So, 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. This is due to its heated nature. Over- litigation due to the desire for revenge can make for 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. Moreover, when partnership disputes include property, it compounds the situation.
Out of Control Lawsuit
A partnership dispute can become its own beast very quickly. Bitter fighting often obscures the original complaint. Oftentimes this kind of atmosphere overshadows resolution by reasonable means. So, 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. To illustrate, when you have a game plan, it’s the difference between driving from Oregon to Florida with a map, or just “heading southeast.” Thus, 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. Pursuing a victory over a point could increase the overall cost of your litigation. On the contrary, 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. This is as opposed to the 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. Surely, avoiding / minimizing partnership litigation is your first line of defense and is the reasonable approach.
When disputes start around money, partners can quickly address it through proper accounting. In order to shorten the process, you could conduct the accountant your own. Then explain what points favor your side of the dispute. Invite the partner to do the same. Above all, 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 the partners order a business appraisal to reach and agree upon a buyout figure. This is an outcome designed when two partners are beyond continuing their agreement; when they are past the point of no return and the disagreement is a lawsuit waiting to happen.
Selling the Partnership
Selling the business is also another way to avoid the break up litigation. Of course this often means that the business is doing well and there is a willing buyer. Once they set a sale price, the business is sold. They pay off business debts, or account for them, and each partner is paid 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.