Sharing the thrills, successes and risks of a business venture with a partner can make owning and operating a company more fulfilling and profitable. But what happens when your partner breaches the partnership agreement agreed upon at the start?
Keep in mind that in a general partnership arrangement, all partners are personally liable in any lawsuit filed against the company for actions or a failure to act by any one partner. So if a partner is in breach of the partnership agreement, it can leave you open to compensatory and punitive damages if any lawsuit is filed and successful in court.
In addition, California Corporation Code §16202 is clear on what is a partnership agreement: “The association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership.”
The biggest takeaway is that the agreement doesn’t have to be in writing and signed for it to be legally valid. A verbal agreement is just as binding in a court of law. While a limited liability partnership protect the personal assets of partners, the law around partnership agreements is the same.
However, if you feel your business partner has breached your partnership agreement, there are legal steps you can take to protect yourself and your business. But first, let’s review the basic elements of a solid partnership agreement.
7 Things Every Business Partnership Agreement Should Include
- Contributions: Each partner’s investment of time, money and resources in forming and operating the business, including any possible future needs.
- Distributions: How and when any profits will be split among partners.
- Ownership: How ownership interests will be handled in if a partner retires or dies, the business files for bankruptcy or is sold, or a partner withdraws.
- Decision-making: How both long-term and day-to-day business decisions will be made.
- Dispute Resolution: The process to resolve any disagreements or disputes among partners, such as mediation, arbitration or a lawsuit.
- Critical Developments: How unexpected events, like an offer to buy the business or a prolonged illness of a partner, will be handled.
- Dissolution: The steps to legally dissolve the partnership.
If your partnership agreement contains the above elements, whether agreed verbally or in a signed document, then any breaches can be legally addressed. If the steps for resolving disputes is in the agreement, you’ll already know what the first step is.
If your partnership agreement doesn’t outline how disputes will be handled, then a business attorney can walk you through the available options.
- Expelthe partner from the partnership.
- Filea lawsuit against the partner for the breach.
- Seek liquidated damages from the partner.
- Negotiate a settlement for the breach.
Each option doesn’t exclude the other options but keep in mind that if you file a lawsuit, it opens your business up to the public because the court record will be a public document.
Under certain circumstances you can seek to void the partnership agreement:
- When a partner isn’t capable of fully understanding all the implications of the agreement.
- When a partner was coerced or threatened to enter the agreement by another partner.
The business attorneys at LawPLA can guide you through the partnership agreement process and in addressing any suspected or known breach of the agreement. Just contact our office by telephone or schedule a consultation with our online tool. We are here for you and your business.