Going into business with one or more other people can be exciting, but it can also be a stressful experience when one or more of your partners does not live up to the terms of the partnership agreement.
When one or more of the partners fails to abide by the terms of the partnership agreement, this is known as a breach of the agreement, or a breach of contract.
In such situations, the remaining partner(s) want to know about options that may be available with a breach of partnership agreement.
We want to provide you with more information about partnerships generally and the importance of partnership agreements, and then to provide you with options that may be available to you if one of your partners breaches the partnership agreement.
What is a Partnership?
The U.S. Small Business Administration (SBA) explains that partnerships are the most basic business structure available to two or more people who want to go into business together. If two or more people decide on a partnership, they have to decide between one of two options: a limited partnership (LP) or a limited liability partnership (LLP).
A limited partnership, or LP, is a business structure in which one general partner has unlimited liability while the other partner(s) have limited liability. The general partner with unlimited liability tends to have greater control over the company, while the remaining partners with limited liability often have less control over the company.
A limited liability partnership, or LLP, is a business structure in which all partners or owners of the business have limited liability and share generally in control over the business.
Limited liability means that you are not responsible for the actions of any of your other partners, and you are not responsible personally for debts associated with the partnership. In both LPs and LLPs, profits are passed through to personal tax returns.
What Should Go Into a Partnership Agreement?
Whether you have an LP or an LLP should be outlined clearly in a partnership agreement. In addition to clarifying whether you have an LP or LLP, the partnership agreement is also an important tool for handling breaches by one or more of the partners.
An article in Forbes explains that the following elements should go into every partnership agreement. While the agreement need not necessarily be in writing, having a written partnership agreement can be extremely helpful:
- Each partner’s financial contributions;
- How the partners will split the profits;
- What will happen if one partner leaves the business or dies;
- What will happen if you need to close the business;
- What will happen in the event of bankruptcy;
- How partners will share in decision-making;
- How partners will resolve disputes (e.g., mediation, arbitration, lawsuits);
- Liquidated damages in the event of a partnership breach; and
- Dissolution of the business.
Handling a Breach of the Partnership Agreement
Generally speaking, the best scenario for handling a breach of a partnership agreement is if your partnership agreement specifically outlines your options in such a situation. If your partnership agreement requires mediation or arbitration in the event of a dispute, you should speak with a lawyer about moving forward with mediation or arbitration.
However, your partnership agreement also could make clear that you are able to file a lawsuit against the other partner for your losses. In addition, your partnership agreement also might make clear whether you can seek liquidated damages and the amount available.
If your partnership agreement does not specify what to do in the event of a dispute or a breach, then you may have one of several options available to you with the help of a business lawyer:
- Expel the partner from the partnership;
- File a lawsuit against the partner for the breach;
- Seek liquidated damages from the partner; and/or
- Negotiate a settlement.
The above options need not be mutually exclusive. For example, you may be able to expel the partner from the business and file a lawsuit against that partner. Depending upon the terms of your partnership agreement, you also may be able to seek liquidated damages for actual or anticipated damages in your lawsuit.