Doing business with your close friend or those who share the same vision as you can be exciting. You have someone with whom to share the burden and the pleasure of growing the business. However, once the partners start to go their separate ways or see a different image of the business, it can become a very stressful experience.
In this article, you will learn general information about a business partnership, partnership agreements, and your options in the event that a partner violates or does not comply with the terms of your partnership agreement.
Understanding the business partnership
A partnership is the most basic business structure available to two or more people who want to start a business together. It is then divided into two options:
It is a corporate structure in which one general partner has unlimited liability and has greater control over the business while other partners have limited liability and often less control.
- Limited Liability Company (LLP)
On the other hand, a limited liability company means that all owners and partners have limited liability and share general control of the business. This means that a partner has no responsibility for the actions of any other partner and is not liable for the debts associated with the partnership.
What happens in a partnership agreement?
Whether you have established an LP or an LLP, there should be a clearly defined partnership agreement. Although a partnership agreement does not need to be in writing, a written partnership agreement can be extremely useful. It is an essential tool to manage the failings of your partners.
So what are the 6 elements of a contract or partnership agreement?
- Financial contributions from each partner and distribution of profits between partners
- How partners make a decision
- How partners resolve disputes
- Considerations if the business should close or go bankrupt
- Plans when a partner dies or leaves the company
- Damages in the event of breach of contract and dissolution of the company
Legal options for broken partnership contracts
Now, if your business partner (s) has violated your partnership agreement, you have a few different legal remedies.
- Company expulsion
When a partner violates the terms of your partnership agreement, their eviction from the business may be a solution. However, given the laws surrounding the operation of the partnership, the possibility of eviction depends on several factors.
Unless your partnership agreement deals with eviction, you may not be able to evict a partner for a violation without dissolving the partnership. With the exception of a two-person partnership, this will require the formation of a new partnership with no excluded members and the creation of a new partnership agreement.
However, most partnership contracts include a clause on revocation of a partner and still allow the partnership to continue without the partner being ousted. When you can kick another partner out, an essential aspect of the deportation is that it must be done in good faith.
Attempting to evict a partner without a valid reason can give the exiting partner a chance to sue the company for damages. Follow protocol and consult with a legal expert before starting the eviction process.
- Negotiate a settlement
This is perhaps the most harmonious option you can pursue. Negotiating a settlement is your best choice if there is no prejudice to the partnership and you want to continue the business relationship, providing the opportunity to re-establish the business relationship between the partners.
In general, written settlement agreements are as binding as other contracts, and the court can enforce them. While you may have to compromise with the offending partner to get the settlement agreement, you can both avoid a long and costly legal battle. Also, you can consider filing a complaint against him, then offer to settle on terms favorable to your interests.
- Liability for violation
You can prosecute an offending partner whether or not you want them kicked out of the partnership. If the partner has voluntarily walked away, this is not considered a breach of contract unless there is a set term for the partnership and the partner withdraws earlier than expected in the ‘OK. However, even in this case, the exiting partner can escape his responsibility if he can justify a valid reason for leaving the partnership.
Now, for other types of offenses like mismanagement of business documents or partnership assets, you and other non-at-fault partners can sue the offending partner for damages.
The damage equation is as follows:
Amount of damage = Actual damage to the limited partnership – The defaulting partner’s participation in the limited partnership
Depending on the severity of the breach and the size of the business, this option may be your best bet.
- Seek damages
An extension of liability for the breach, most partnership contracts include clauses that require the breaching partners to pay a sum of money or lump sum damages to partners harmed by the breach. partnership process.
If the partnership contract contains a damages clause that is too large or too small for the offending partner’s participation in the partnership, the court is unlikely to enforce it. When this happens, the court may just award compensatory damages.
However, even with a favorable court decision, the winning party still has to execute the judgment, which can be difficult in some cases.
A few points to note
The above legal options do not need to be mutually exclusive. You can kick a partner out of the business and then take legal action against the outgoing partner. Depending on the terms of your partnership agreement, you can also claim damages for foreseen or actual damages in your legal action.
Building a business with someone who shares your goals and vision lightens responsibilities and ensures business development. However, when partnerships do not end on good terms with one or more partners who do not live up to their obligations or violate the terms of their partnership agreement, things can become stressful and frustrating, which opens the partnership to legal action. .
When this happens to you, be sure to consult a legal expert and ask what remedies may apply to your situation.