In today’s Freedom Friday blog and email newsletter, I want to talk about a topic that doesn’t come up enough, and that’s partnership disputes, and especially how to prevent them. A few weeks ago, I talked about how to deal with rogue business partners, but this week I want to talk about how to prevent a business partner from going rogue. How do you do that? In today’s Freedom Friday blog and email newsletter, I’m talking about how to prevent partnership disputes.
First of all, regardless of whether you have an LLC or an actual business partnership as your business structure, there are several issues which can cause partnership disputes in a small business. A big issue is business operations slowing down or coming to a halt. If you have employees, they can get in the way of moving towards solutions instead of conflict between the partners. Customers can notice the instability which will also affect the business. All of this can create reputational damage and even legal fees, and that means everyone loses.
When these issues are going on, the interpersonal relationships between the co-owners of the business can cause the tension to escalate and bloom into a dispute. It all can start with silence, missed calls, and unilateral decisions. This can lead to passive-aggressive conduct amongst the co-owners, threats of buying out each other’s ownership interests, and even deadlock, no path to dissolve, no way to valuate the business (figure out how much its worth), and no clean exit. At the same time, creditors can grow impatient, employees (if any) leave, and the customers suffer.
So, what can you do to avoid all of this? If you’re in an actual business partnership, then you need to have a partnership agreement. If you’re in an LLC, then these issues need to be spelled out in your operating agreement. The partnership agreement or operating agreement needs to have a solid buy-sell provision which explains how, when, and under what terms a co-owner can leave the business. You should also have a provision on how to handle deadlock, especially if you have an even number of co-owners who each have the same percentage of ownership in the company. The partnership agreement or operating agreement should also have a valuation method, which is a way to figure out how much the business is worth. Many small businesses use the book value method, but there are other ways. Of course, the partnership agreement or operating agreement needs to define the roles of the co-owners and explain their voting rights.
Thinking about starting a small business? Or maybe your small business is having issues with contracts, leases, business partners, collection issues, or experiencing other barriers to growth? Please contact me at Jonathan@libertylegalok.com to schedule a FREE strategy session.
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