Doing business with your close friend or those who share the same vision as you can be exciting. You have someone to share the burden and thrill of growing the business. However, once partners start to grow apart or see a different picture of the business, it can become a very stressful experience.
In this article, you’ll know general information about a business partnership, partnership agreements, and your options in case a partner breached or doesn’t live up to the terms of your partnership agreement.
Understanding Business Partnership
A partnership is the most basic business structure available for two or more people who wish to establish a business together. It’s further divided into two options:
- Limited Partnership (LP)
This is a business structure in which a general partner has unlimited liability and has greater control over the business while other partners have limited liability and often have less control.
- Limited Liability Partnership (LLP)
On the other hand, a limited liability partnership means all owners and partners have limited liability and share general control over the business. It means a partner has no responsibility for the actions of any other partners and isn’t responsible for the debts associated with the partnership.
What Goes Into A Partnership Agreement?
Whether you’ve established an LP or LLP, there should be a clearly outlined partnership agreement. While a partnership agreement doesn’t need to be in writing, having a written partnership contract can be extremely useful. This is an essential tool for handling breaches by your partners.
So, what are the 6 elements of a contract or partnership agreement?
- Financial contributions of each partner and how partners split profits
- How partners make a decision
- How partners resolve disputes
- Considerations if the business needs to close or go bankrupt
- Plans when a partner dies or leaves the business
- Liquidated damages in case of contract breach and dissolution of the business
Legal Options Of Breached Partnership Contracts
Now, if your business partner/s breached your partnership agreement, you have a few different legal remedies.
- Expulsion From The Business
When a partner violates the terms of your partnership agreement, expelling them from the company may be a course of action. However, since the laws surrounding how the partnership operates, the possibility of expulsion depends on several factors.
Unless your partnership agreement addresses expulsion, you might not be able to expel a partner for a breach without dissolving the partnership. Except for a two-person partnership, this will need the formation of a new partnership without expelled members and creating a new partnership agreement.
However, most partnership contracts have a clause for the dismissal of a partner and still allow for the continuance of the partnership without the ousted partner. When you can expel another partner, a critical aspect of the expulsion is that it should be done in good faith.
Attempting to expel a partner without a good reason can give the departing partner a chance to sue the partnership for damages. Follow the protocol and consult with a legal expert before you start the expulsion process.
- Negotiate A Settlement
This is perhaps the most harmonious option you can pursue. Negotiating a settlement is your best choice if there’s no harm to the partnership and you wish to continue the business relationship, offering the possibility of restoring the business relationship between partners.
In general, written settlement agreements are as binding as other contracts, and the court can enforce them. Although you might have to compromise with the breaching partner to secure the agreement for settling, you can both avoid a time-consuming and costly legal battle. Also, you can consider filing a lawsuit against him, then offer to settle on terms that are favorable to your interests.
- Liability For The Breach
You can sue a breaching partner, regardless of whether or not you want him expelled from the partnership. If the partner voluntarily walked away, it’s not considered a breach of contract unless there’s a stated set duration for the partnership and the partner step down earlier than what’s provided in the agreement. However, even in this case, the departing partner can avoid liability if they can show a good cause for leaving the partnership.
Now, for other kinds of breaches like the mishandling of business documents or partnership assets, you and other non-breaching partners can sue the breaching partner for compensatory damage.
The equation for damages goes like this:
Amount of Damage = The Partnership’s Actual Damage – The Breaching Partner’s Investment Stake in the Partnership
Depending on how significant the breach is and how big the company is, this option may be your best option.
- Seek Damages
An extension of liabilities for the breach, most partnership contracts include clauses that require breaching partners to pay a set amount of money or liquidated damages to partners harmed by the breach.Liquidated damages are enforced only when reasonable, with respect to the expected damages in the partnership lawsuit.
If the partnership contract states a liquidated damage clause that’s too large or too small than the breaching partner’s investment stake in the partnership, the court will probably not enforce it. When this happens, the court may just reward compensatory damage.
However, even with a favorable court decision, the winning party still needs to enforce the judgment, which can be difficult in some instances.
A Few Things To Note
The above legal options don’t need to be mutually exclusive. You can expel a partner from the company and then file a lawsuit against the departing partner. Depending on the terms of your partnership contract, you can also seek liquidated damages for the expected or actual damages in your lawsuit.
Building a business with someone that shares your goals and vision eases the responsibilities and ensures business development. However, when partnerships don’t end on good terms with one or more partners not meeting their obligations or violating terms in their partnership agreement, things can become stressful and frustrating, which opens the partnership to legal action.
When this happens to you, make sure to consult a legal expert and ask which remedies mayapply to your situation.