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Business Debt & Partnerships: What You Need to Know to Protect Yourself

If you have decided to start a small business with a partner, or you already own a business with a partner, it is wise to take steps to protect yourself. Many small businesses throughout the United States operate as general partnerships. However, very few business owners understand how to protect their legal interests should something go wrong. A partnership can be the riskiest type of business ownership, and many businesses end up splitting up. By following these steps, you can protect your assets from creditors, settlements, and lawsuits.

Create a Written Partnership Agreement

Creating a written partnership agreement is the most important step to protect yourself. Even if you trust your business partner completely, you need to create a written agreement. Business relationships are often incredibly stressful, and they can become strained due to economic downturns, declining property values, or poorly performing investments. Business partners often feel their relationships become strained due to financial pressures that can break down their collaboration and trust. 

Even when you have an excellent relationship with your business partner, an accident could result in financial danger. For example, suppose you are at a business meeting with your partner at a popular restaurant chain. You get into your company car to drive back to your office, and your partner negligently veers into another lane and causes a dangerous car accident. Now, your partner is facing a personal injury lawsuit that could result in your assets being taken.   Depending on the court’s ruling, business assets, and your partner’s personal assets could be at stake.

By creating a written agreement, you can define your ownership interests, responsibilities, and roles. Discussing the partnership agreement can be challenging, especially if your business partner is a family member or good friend. You may be worried you will hurt their feelings or offend them if you insist on creating a written agreement. Nonetheless, making a written agreement can prevent disputes in the future that could negatively impact your relationship with your partner and your business itself. Many partnership contracts set forth the protocol for resolving disputes that could arise.

Protect Yourself From Your Partner’s Debts

In your written partnership agreement, make sure you limit the amount of debt partners can tie to your business without other partner’s consent. If you do not, your partner could tie your partnership to a debt or business agreement against your will or without your knowledge. Another way to protect yourself is to ensure your partnership invests in a high-quality commercial insurance policy. It is hard to predict what types of business alternate events can happen that could bankrupt your partnership. It only takes one personal injury lawsuit award of damages to destroy a small to a medium-sized partnership. Many insurance policies will cover the operating costs when you need to close down for events outside of your control, helping you stay afloat in uncertain circumstances. 

Many times, partners do not want to invest in an insurance policy because they can be expensive, and they may not have the operating capital to pay for the insurance policy. We recommend finding the resources to pay for an insurance policy, which can be your best defense when operating a general partnership. If you are starting your business, we recommend including the cost of a commercial insurance policy and your startup plan. In some cases, a commercial insurance policy can be the difference between your business surviving or going bankrupt.

Ensure Proper Accounting

Keeping your accounting and tax information up-to-date is important when it comes to protecting your interest in a partnership. We have all heard about cases in which one partner is embezzling money from the company, breaching a contract, or acting in his or her own interest rather than the interest of the partnership. In other cases, one partner will engage in fraud for months or even years before the other partner becomes aware of it. 

Prepare an Exit Strategy

One of the ways you can protect yourself from fraud is to keep close tabs on your accounts. That way, when any conflict arises regarding money, you can address the conflict quickly through accounting. Additionally, keeping your accounting books up-to-date will provide you with defense should you become implicated in your partner’s fraudulent or illegal activities. Similarly, when you use a respectable accountant, he or she may be able to detect any fraudulent behavior as soon as possible and make you aware of it.

Beginning a new business is exciting, and the last thing on your mind is probably what will happen if you need to exit your business. It is always important to consider the future, however. What will happen to your interest if your partner passes away unexpectedly or decides to leave your partnership. If you choose to do so, you can create an option for you to buy out your withdrawing partner’s interest in the partnership. Taking time to negotiate and agree on the terms of a potential buyout is important because it will ensure that the buyout is fair for you and your partner. 

Determine How You Will Sell the Partnership

You may not anticipate selling your partnership now, but it is important to think about what process you will use if you and your partner decide to sell. Perhaps your partnership will become incredibly profitable, and you decide to sell it for a hefty sum. How will you go about negotiating the sale? Consider the potential sale of your partnership when you write your partnership agreement. An experienced lawyer can help you protect your rights when drafting your partnership agreement.

Contact an Experienced Lawyer

The best thing you can do to protect your interest in a partnership is to speak with an experienced business lawyer who can advise you of your rights and review your partnership agreement. Contact Fox & Moghul, Attorneys at Law today to schedule your initial consultation.

Fox & Moghul - Real Estate

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