Business partnerships can expand your company’s access to greater opportunities with a wider range of skills. However, they also come with some challenges. When the partnership agreement leaves room for interpretation, it puts both of you at risk of misunderstandings.
There are a few common reasons for partnership agreement disputes.
1. Mismatched expectations
If each partner has a different understanding of their roles, responsibilities, and financial contributions, it leads to conflict. As you draft your partnership agreement, both parties should take time to clearly outline their expectations for the business and each of your roles. This reduces the chances of confusion or misinterpretation.
2. Unequal contributions
Partnerships often include varying levels of investment for each party in both capital and effort. Disagreements may arise if a partner feels that their contributions are unequal. Include detailed information about each party’s contributions as well as the distribution process for profits and losses. Adjust this schedule as necessary based on business changes.
3. Differences of opinion
Differing opinions about how to run the business often lead to conflict. When one party has a conflicting vision or changing priorities, it can affect the direction of the business. Include resolution mechanisms for disagreements to guide conflicting decisions.
4. Lack of exit strategy
As much as you might want it to, partnerships do not often last forever. If your partnership agreement lacks a defined exit strategy, it can cause disputes if one partner wants out. Make sure that the contract provides an avenue for release from the agreement, including the valuation of the partner’s share, the buyout process and any non-disclosure or non-compete clause.
According to IRS tax return records from 2020, there are 4.3 million partnerships in the United States. Clear partnership agreements contribute to the success and stability of those operations.
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