Signs That a Partnership Fight is Looming

Forming a partnership is often an excellent way of starting and running a business. There are tax advantages, mutual help and assistance is created, different skills sets can enhance the chances of success, etc. However, as with any relationship, conflict can result from the stress of running a business and divergent personalities. A good corporate lawyer can help in the startup phase of your partnership with advice and a well-drafted partnership agreement. Such an agreement is essential to have whenever a partnership fight flairs. Here are some signs that a partnership fight is looming and some tips on working through them.

San Diego Partnerships: One Partner is Not “All-In”

Often, partnership fights are caused by the partners having different emotional and workhour investments in the partnership — or merely the appearance that one partner is not as involved as the others. During the startup phase, this can happen when partners are transitioning away from earlier employment. As time progresses, one partner is still working for his/her former employer or otherwise tied to a previous work situation. From the perspective of the other partners, this divided attention suggests that the partner is not “all-in.” At later stages of a partnership, this lack of focus can occur if one partner begins exploring new financial and career opportunities. A divided focus of this sort almost always generates conflict and results in a partnership fight. Timetables and deadlines in your partnership agreement are one way to around this type of problem. Likewise, the agreement should state — in clear language — the expectations of the partners about the term of the partnership and when partners can explore other options.

San Diego Partnerships: Differential Financial Commitments

Money is the root of many partnership fights. Many partnerships are formed because the partners can pool different sets of resources; some might have financial liquidity and others might bring high levels of skill, expertise, and exploitable networks in the particular market. However, if there is a constant demand for more and more financial and tangible investment, this creates a differential level of input, particularly if other partners are still only bringing non-tangible resources into the partnership. The partners being asked to invest more and more cash will eventually feel exploited. A fight is likely under such circumstances. Caps and other clear guidelines with respect to cash/resource infusions in your partnership agreement can help.

San Diego Partnerships: Differential Financial Risks

If the partnership is not doing as well as expected financially, another danger sign is differential financial risks. As we have discussed in other articles, each partner is liable wholly for partnership debts and liabilities. Thus, in the event of legal proceedings, a creditor can “go after” one partner who may have substantial cash holdings and other easily liquidated assets. Such a partner possesses a higher risk level than the other partners. The partnership agreement can solve some of these concerns with indemnity provisions and insurance requirements.

San Diego Partnerships: Demands for More Higher Partnership Draws

Probably the biggest sign that a fight is looming is a disagreement among the partners with respect to partnership draws. Certain partners want more money from the business for personal needs and wants; others want to maintain cash flow and a solid financial base for the partnership. Although marriages and new family members are happy occasions, such are also sometimes the precursors to new demands for higher draws. Again, clear guidelines in your partnership agreement can help avoid partnership fights by helping to manage expectations. Clear formulas based on the financial performance of the partnership are best.

San Diego Partnerships: Not Communicating/Not Listening

Another common sign that a fight is looming is failure of communication among and between the partners. The only way to solve business problems is to talk about them and reason out various solutions. If the partners are not talking, they are not solving the problems and a fight is on the horizon. A related problem is not listening; certain partners might be talking, but the others are not listening. Again, a sure sign that a fight is on the horizon.

San Diego Partnerships: Deadlock

Deadlock is another large indicator that a partnership fight is looming, and likely a legal fight. Your partnership agreement must have procedures and mechanisms for decision-making, including mechanisms for breaking deadlocks. If, for example, there are four partners with a 25% vote on all important decisions, it is foreseeable that the partners could end up deadlocked over some business decision. A good partnership agreement will have a procedure for breaking the deadlock so that the business can move forward and that everyone can avoid litigation. Many options are available such as involving a trusted outside party to cast the tie-breaking vote, use of a randomizing mechanism, etc.

Contact San Diego Corporate Law Today

If you would like more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard can draft your partnership agreement to avoid common sources of partnership fights. Mr. Leonard can also help with all the other legal services necessary for a successful business. Mr. Leonard can be reached at (858) 483-9200 or by email.  Mr. Leonard proudly serves business owners and residents in San Diego and in the surrounding communities.

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