For individuals who wish conduct business together, entering into a partnership remains one of the most popular structures to jointly conduct a business.
Partnerships have a number of advantages that are desirable to persons wishing to conduct businesses together:
- It is easy to establish a partnership;
- Partnerships have low start-up costs;
- Partnerships allow the persons involved to contribute more capital, knowledge, expertise, and experience to the business and any one individual can contribute;
- A partnership increases the capacity of the business to borrow monies needed to develop the business;
- There is limited external regulation, mostly from the relevant state partnership acts.
There are also disadvantages to a partnership that should be carefully considered before parties use a partnership structure as a means of conducting business together. These include:
- Unlimited liability for the debts of the partnership business;
- Each partner is jointly and separately liable for all partnership debts;
- Subject to specific partnership legislation, partnerships are in essence a business relationship between persons conducting business together. Relationships may deteriorate and become stressed over time as the personal and business goals of the partners change or personalities clash. This may lead to serious disagreements and disputes about the objectives and management of the partnership business and the sharing of partnership profits or losses;
- Each partner is an agent of the partnership and any and all partners are liable for the actions of any other partner;
- If any one partner wishes to exit the partnership, it may require a costly valuation of the partnership assets and businesses in order to allow the remaining partners to pay out the exiting partner for the value of his or her share of the partnership. This may be a costly process.
Disputes may arise for a number of reasons including:
- One partner underperforms or acts in a way that unreasonably increases a partnership debt or losses, or exposes other partners to a risk of liability for legal claims;
- One of the partners breaches his or her duty of trust to the other partners by taking profits or benefits for which he or she is not entitled;
- Conflicts of interest in which one partner prefers his or her own interest (e.g., operating a separate business) to the interests of the partnership.
Although a dispute between partners may be resolved by the one party exiting the partnership and being paid out for the value of the retiring partner’s share in the partnership, a serious dispute between the partners may lead to the dissolution of the partnership and an appointment by the Court on an interim basis of a receiver to preserve the value of the assets in the partnership business pending the resolution of the partnership dispute or even to sell the partnership assets and business to a third party.
The best way to manage partnership disputes is to have from the start, before the partnership business commences, a carefully drafted partnership agreement, and a deed of dissolution of partnership which is agreed to take effect on certain events, annexed to the partnership agreement.
If a partnership dispute arises in the course of carrying on the partnership business, it is important to seek legal advice as early as possible about how to resolve the dispute, or if the dispute cannot be resolved, the best strategy for dissolving the partnership.