Starting a business with a partner often feels like the perfect match—shared visions, complementary skills, and the excitement of building something together. This creative energy helps to drive us to get the project started, and we can go a long way on that excitement. But what happens when disagreements arise, responsibilities aren’t clear, the vision changes, or trust begins to erode?
Many business owners overlook the legal precautions that protect them from disputes with their partners, assuming goodwill is enough. Unfortunately, without clear agreements in place, even minor conflicts can snowball into costly legal battles that threaten the future of your business. We often tell our clients that during the process of drafting these agreements, we might end up stimulating some conflict. This can lead to confusion, but in reality, it is important to understand in the beginning any fundamental differences and how to bridge them, otherwise you’ll only find out about these issues later on, when the stakes (and tension) is too high.
In this post, when we say “partner”, we are using this term broadly, so this could be referring to a co-founder in a corporation, another member of your LLC, or it could be an actual “partner” if you are an owner of a certain type of partnership entity. Below, we’ll give you some general guidance and explore how to spot potential risks in your business relationships and outline actionable steps to legally protect yourself.
The Problem: What Happens Without Legal Safeguards?
Partnerships built on verbal agreements or loose understandings often face serious risks, such as:
- Unclear Roles and Responsibilities
Without a written agreement, partners may have different assumptions about their roles, leading to resentment or missed expectations.
- Financial Disputes
Disagreements about profit sharing, reinvestment strategies, or expenses can disrupt operations and strain the partnership.
- Exit or Dissolution Conflicts
If one partner wants to leave or sell their share of the business, the lack of a defined process can lead to disputes over valuation, ownership, or control.
- Liability Exposure
In some partnerships, one partner’s actions—such as incurring debt or signing contracts—can expose the other partner to unexpected liabilities.
The Solution: Take Legal Steps to Protect Yourself
Strong legal safeguards help define the partnership’s framework, reduce misunderstandings, and provide a clear path for resolving disputes. This agreement will be different depending on the type of entity you have (LLC, corporation, partnership, etc.), so make sure you speak to your attorney about the right kind for your business, but each type should contain the following types of provisions in order to protect your interests:
- Create a Comprehensive Agreement with your Partners
Why It Matters
A partnership agreement acts as the foundation of your business relationship, defining each partner’s rights and responsibilities.
What to Include
- Ownership percentages and contributions (financial or otherwise).
- Roles and responsibilities for each partner.
- Profit-sharing arrangements and reinvestment policies.
Pro Tip: Include dispute resolution clauses, such as mediation or arbitration, to handle disagreements efficiently.
- Establish Decision-Making Processes
Why It Matters
Disagreements about major business decisions can stall progress and create tension. A clear decision-making framework ensures smoother operations.
What to Include
- Voting rights and thresholds for different types of decisions.
- A process for resolving deadlocks (e.g., third-party arbitration, tie-breaking votes, buy-out rights).
- Delegated authority for day-to-day decisions.
Pro Tip: Define which decisions require unanimous consent versus majority approval to avoid unnecessary bottlenecks.
- Protect Yourself with Liability Clauses
Why It Matters
Partners may unintentionally expose each other to financial or legal risks, such as unpaid debts or breaches of contract.
What to Include
- Limitations on each partner’s authority to bind the business.
- Indemnification clauses to protect against losses caused by another partner’s actions.
- Personal liability protections, especially in general partnerships.
Pro Tip: A general partnership subjects all partners to liabilities incurred by the other partners. Consider forming an LLC or corporation instead of a general partnership to separate personal and business liabilities.
- Plan for Exits and Ownership Changes
Why It Matters
At some point, one partner may want to leave the business. Without a clear exit strategy, the process can become contentious and disruptive.
What to Include
- Buyout terms, including valuation methods and payment timelines.
- Restrictions on transferring ownership to third parties.
- Succession planning for unexpected events like illness or death.
Pro Tip: Regularly review and update the agreement to reflect changes in the business or partnership.
- Conduct Regular Financial Audits
Why It Matters
Transparency in finances builds trust and reduces the risk of disputes over money.
What to Do
- Implement regular financial reporting and audits.
- Use accounting software that all partners can access for real-time updates.
- Agree on a process for approving major expenses or investments.
Pro Tip: Establish clear guidelines for personal expenses versus business expenses to avoid conflicts.
- Choose the Right Entity Type (THIS SHOULD ACTUALLY BE #1)
Why It Matters
If you use the wrong entity structure, you could set yourself up to be liable for the actions of your partner, even if you did not approve it.
What to Do
- Choose an entity structure that gives you limitation of liability.
- Speak to professional advisors (e.g., your attorney and CPA) to help you decide the most advantageous entity type.
- Follow through with creating the entity, drafting and signing the right legal documents, to protect you and your partners.
Pro Tip: Establish clear guidelines for personal expenses versus business expenses to avoid conflicts.
Conclusion: Protect Your Partnership, Protect Your Business
A successful business partnership isn’t just about trust—it’s about preparation. By taking proactive legal steps, you can safeguard your relationship with your partner and protect the business you’re building together.
If you’re ready to solidify your partnership with a legally sound agreement, Hiatt Law is here to help. Let’s talk about crafting a partnership agreement that ensures clarity, trust, and long-term success. Book a consultation today or email us at hello@hiattlawaz.com to get started.
