215-482-0285
Philadelphia Business Lawyer Sarah E. Holmes
  • Home
  • Attorneys & Areas of Law
    • Business Entities >
      • Corporations
      • Limited Liability Company (LLC)
    • Business Purchase or Sale
    • Raising Capital & Investor Agreements >
      • Promissory Notes and Debt Financing
      • Private Placement and Equity Financing
    • Business Contracts >
      • Consulting Agreement
      • Employment Contracts
      • Independent Contractor (1099) Agreements
      • Website Terms and Privacy Policies
    • Copyright & Trademark
    • Hiring Employees/NDA/Non Compete
    • Succession Planning
    • Commercial Lease
    • The Right Start Program
  • About
    • Speaking and Events
    • Webinars
    • Client Testimonials
    • Privacy Policy/Terms of Use
    • Contact
  • Business Success Tips
  • Flat Fee Packages
    • New Businesses
    • Existing Businesses
    • Dispute Resolution
    • Trademarks & Copyright
    • Succession Planning
  • Reviews
215-482-0285

How to Manage Business Partners and Resolve Partnership Disputes

2/3/2022

 
No matter how well matched you are with your business partner, disagreements and conflicts are inevitable. But conflict does not have to derail your partnership.
By preparing and setting up conflict resolution tools ahead of time, you and your partners can better weather the storms that come with the wild ride that is business ownership.

It's great when business partners share the same values and have a track record of working well together. But circumstances change all the time, especially in a COVID-19 world – which can put pressure on even the strongest business relationship. Or you and your partner may be working together for the first time, still figuring out each other’s communication styles.

Either way, you can take certain steps to better position your partnership for success.

How Do You Avoid Partnership Disputes?Not all conflicts are inevitable. Some can be avoided with the right planning and foresight.
By minimizing avoidable conflicts, your business partnership can operate smoothly with fewer bumps, especially when you’re first getting started. The conflict resolution frameworks you put into place early on could end up saving your joint venture down the line.

Give Clear Decision-Making PowerIf you plan to enter into an equal partnership with one other partner, you might figure that a 50-50 split of decision-making power makes the most sense.
But a 50-50 split between two partners sets you up for a potential gridlock – a 1-vs-1 stalemate when you disagree. If you both refuse to compromise, your partnership may be unable to move forward in any way and you may have to dissolve your venture.

To avoid this stalemate, you should decide early on who will get ultimate decision-making power in the case of a disagreement. This could mean that you choose a 51-49 split between partners instead. Or you could choose a “designated decider” third party to break any stalemates – this could be a trusted business attorney or another stakeholder in the company. 

Create a Robust Partnership Operating AgreementYour partnership operating agreement is the single most important document when it comes to setting up your business for success. You may be excited to get started on your partnership and hit the ground running, but taking the time to properly consider and establish your partnership terms first could save you untold headaches down the road.
Some of the most important terms in your partnership agreement involve:

  • Establishing the purpose of your partnership. What products or services will you be selling? What actions will you need to take to make your vision come true?
  • Deciding what governing law will apply. In the case of a dispute, which state laws should determine the outcome? Which courts would you prefer to hear your case?
  • Detailing each partner’s ownership, responsibilities, decision-making authority, and partnership contributions, such as capital, expertise, assets, or time.
  • Determining how profits and losses will be divided among partners. Make sure everyone is on the same page when it comes to what they’ll be earning and what liabilities they can expect to take on for the partnership.

Managing expectations is key when it comes to minimizing unnecessary conflict. Your partnership agreement should reflect your vision and keep your venture on track.
You could also include a mission or values statement along with your partnership agreement, where you set out the culture, growth philosophy, and commitments of your venture.

Meet Your Partner(s) in the MiddleEvery partnership is unique. Consider how you and your partner complement each other. Cater to each partner’s strengths whenever possible and recognize your weaknesses.
Transparency is critical when it comes to the success of your partnership. You and your business partners must be able to communicate honestly and effectively with one another.
Problems often arise when communication breaks down, so one solution could be to schedule a regular meeting where partners can freely communicate their concerns. You could even detail a mediation plan in your operating agreement that gives you a path forward when conflicts arise.
Bring a Professional Into the RelationshipDespite the professional nature of business, partnerships can get extremely personal. Bringing in an objective third party such as a business attorney can be a game-changing source of support, helping partners anticipate and resolve difficult issues before they become problems.

When you’re in the thick of starting your business partnership, the bigger picture is often hard to see. A business lawyer can help you focus on your goals with effective strategies catered to your partnership’s unique needs. An objective professional can also make sure each partner’s needs and expectations are met when they might otherwise get overlooked.

How Do Business Partners Resolve Conflict?Conflict does not have to tear apart your partnership. The strongest partnerships aren’t free of all conflict – rather, they can successfully work through conflict to keep moving forward.
Address Disputes Early OnWhen needs don’t get addressed, they can fester into resentment. Have a conflict resolution procedure in place to help partners bring up any issues before they get worse. Hopefully, you and your partners have a regular meeting where you check in with each other. If you don’t, you should bring up any issues with your business partners as soon as they arise.
This is where a third-party professional can really help grease the wheels of communication. 
Partnership MediationMediation involves bringing in a neutral third party who acts as an intermediary between two disputing partners. Business mediators are trained in communication, negotiation, and conflict-resolution techniques. Mediation is a great alternative to litigation – going to court to resolve a partnership dispute can get complicated and expensive.
When you choose mediation over litigation, you and your partner negotiate the resolution instead of a judge deciding the outcome of your dispute.
Business partnership disputes are bound to happen. When they do, you should keep your partnership’s ultimate goals in mind. Ideally, you and your partner can come to a resolution amicably and effectively. The more prepared you are for the possibility of a dispute, the better chance you’ll have at resolving the issue and continuing your venture’s growth.
Call the Philadelphia area offices of Holmes Business Law now at 215-482-0285 or use our contact form to prepare your partnership for success.

How to Handle Distributions, Allocations, and Profit/Loss Division in Partnerships

1/24/2022

 
If you’re entering into a new business partnership, you should decide how you’re going to split profits and losses between partners before you start making money. You don’t want to find yourself fighting over debts after the fact. The best way to avoid partnership disputes over profits and losses is by planning their allotment in your partnership agreement.

Without a partnership agreement in place, equal partners assume profits and losses equally. This might work in some cases, but partners with absolutely equal power risk running into a decision-making stalemate that could derail their partnership.

Partnership profits and losses are often distributed based on capital contributions and management responsibility. General partners take on greater personal risks and are often rewarded with greater profits to reflect their precarious position, while limited partners are shielded from liability beyond whatever they’ve invested in the partnership.

Technically, your partnership’s profit and debt-sharing ratios could be whatever arbitrary numbers the partners agree upon – as long as you specify the terms in your partnership agreement. Your arrangement should reflect the investments made and risks taken by each partner in the venture so that nobody feels shortchanged when it comes to profit distributions.

A qualified business attorney can help you weigh all of the relevant factors and come to a profit- and debt-sharing agreement that sets up your partnership for success.
How Can Partnership Profits and Losses Be Distributed?However you decide to divide your profits and losses, you should clearly lay out these terms early on in your partnership, ideally in your partnership agreement. Unless you specify otherwise, the law will generally divide profits and losses equally between equal partners.
Many factors can affect how a partnership splits its profits and losses. The amount each partner gets will depend first on whether they are a general or limited partner.
  • General partners tend to take on more of the risks so they often get more of the profits. In the case of debts, general partners are personally liable for a partnership’s losses. Also, general partners tend to be actively involved in managing the partnership’s operations, contributing more time and effort than limited partners.
  • Limited partners are only liable for the amount that they invest into the partnership. Unlike general partners, their personal assets are off limits to the partnership’s creditors. Limited partners also tend to have less management responsibility. Compared to general partners, limited partners often get a smaller proportion of the partnership’s profits.
A partner’s contribution to the partnership could take the form of:
  • Money or capital – Many partnerships are formed because one partner has the ideas but not the money necessary to see them through. In your partnership agreement, you could include terms for profits and losses to be divided based on the ratio of capital contributed by each partner over the course of that year. So the partner who contributes the greatest capital will get the greatest proportion of profits.
  • Knowledge or resources – While one partner may be contributing financially, another could bring valuable information or resources to the table. One partner’s patent or copyright could be worth just as much as or more than a significant capital contribution. One partner’s professional expertise could be critical to the success of the partnership, where the partnership would fail without their knowledge or industry connections. Your partnership agreement could split profits to reflect this value.
  • Time and effort – Even if one partner brings in a significant chunk of capital, another might spend dozens of hours every week to ensure the success of the partnership. They may act as the partnership’s boots on the ground, making sure the business operates on a day-to-day basis as well as keeping on track to meet long-term goals. You can reward their time and effort by reflecting that value in the partnership’s profit-sharing agreement.
There is no one-size-fits-all approach to profit and loss sharing in business partnerships, which is why templates you might find online will often fall short. The arrangement you and your partners agree upon should depend on the unique circumstances of your partnership.
Examples of Profit and Loss Distribution in PartnershipsYour loss distribution and profit-sharing agreements make up two important parts of your partnership agreement. Ultimately, your partnership agreement should show a full picture of your business arrangement: the number of total partners, the responsibilities and contributions of each partner, and the liabilities each partner takes on.
Some common examples of profit-loss sharing scenarios may look like:
  • Partner A and Partner B each contribute $100,000 in forming a business partnership. Partner A manages all of the day-to-day operations while Partner B is a silent backer. Because Partner A has greater responsibilities, their partnership agreement states that they will share losses equally but Partner A will receive 80% of the profits.
  • Partner A contributes $200,000 while Partner B contributes $100,000 to their new partnership. Both are equally responsible for managing the partnership’s day-to-day operations. Their partnership agreement states that profits and losses will be divided in proportion to the amount in each partner’s capital account on the last day of the year.
  • Partner A contributes $200,000 while Partner B contributes $100,000. Partner A is responsible for day-to-day operations while Partner B handles upper-level management. Their partnership agreement states that Partner A will take on 70% of the profits and losses based both on their greater capital contribution and because their responsibilities require a greater amount of time and effort compared to Partner B.
The hypotheticals can go on and on. If your partnership receives contributions beyond cash capital, you may have to bring in expert appraisers to properly determine what they’re worth. You may need appraisers for real estate, office space, patents, trademarks, copyrights, office equipment, machinery, or other technologies that partners bring to the table.
You can also revisit your profit-sharing and loss-sharing agreements as your partnership grows. You can always update these agreements to reflect changes in your business.
The best approach is to come up with a profit and loss distribution model that makes sense to you. It’s best to do this early on in your partnership, ideally with the help of a business attorney who has experience evaluating partnership contributions. Call the Philadelphia area offices of Holmes Business Law now at 215-482-0285 or use our contact form to get started.

Establishing the Basics of Your Partnership Operating Agreement

1/7/2022

 
Your partnership operating agreement is the most important document when it comes to setting up your business partnership for success. A proper partnership agreement should establish several key operating decisions, such as each partner’s contributions to the venture, their voting rights, percentage of ownership, management duties, and share of profits. But the basics of your partnership operating agreement are just as important – your business name, where your office will be located, the actual purpose of your business. These “basics” of establishing your business partnership are often not that basic after all, which is why you should get a business lawyer involved early on in the process.

To start, picking a name for your business partnership sounds simple enough. But before you settle on a name, you must make sure the brand or trademark isn’t already taken. You must also make sure to include the proper legal name of your business as well as any additional trade names or “fictitious names” such as “doing business as” (DBA) names.

For example, the legal name of your limited liability partnership could be “Company ABC, LLP,” but you may also refer to your business as “The ABC Company” in advertising materials and simply “ABC” in internal documentation. These trade names should all be properly registered and associated with your partnership’s legal name.

Missing these critical details could cost you later on – for example, if you have to change the name of your business after months of building your brand. The best approach is to be as thorough as possible from the start so that the foundations of your partnership start off strong.

Where Should You Register Your Partnership’s Main Office?
As you set up your business partnership, you must decide where your business will be registered (with a registered agent) and where you will have your “principal place of business.” Your headquarters does not have to be the same place your agent is registered.
Your principal place of business is the primary location where your partnership conducts the bulk of its business functions. Usually, this is the place where the partnership keeps its business books and records as well as where the partners or senior management report when they go on-site.

However, this may change depending on the nature of your business. For example, you may have one office for board meetings but another location where the company’s operations are actually coordinated and managed.

Your principal place of business does not have to be a “traditional” office. A dentist’s main office could be the location where they see patients. For an auto mechanic, your principal place of business could be the garage where you repair vehicles.

If your principal place of business is in a different state than where you originally registered your partnership, you will have to register and designate a registered agent in both states.

For example, if you registered your partnership in Delaware but your headquarters operates out of Pennsylvania, you will need a registered agent in both states.

Your partnership’s state of registration and principal place of business will determine how you get taxed, whether you have any additional legal requirements to fulfill, and where your partnership could get sued in the case of a legal dispute. A business lawyer can help you determine the best and most strategic configuration for your partnership.

What Is the Length and Purpose of Your Partnership?
How long do you and your partner plan to be in business together? Are you collaborating on a one-shot or long-term venture? Do you plan to sell your company or take it public?

What products or services will you be selling exactly? How do you plan to conduct your day-to-day business? What metrics will you use to calculate your success?

These are all important questions to consider while you’re forming your partnership. And although the answers may seem basic or even self-explanatory, your partnership benefits from laying out the length and purpose of your venture in clear terms from the beginning.

Stating your partnership’s purpose helps keep you on track towards your goals. Not only that, but the terms of your partnership operating agreement will come into play if there’s ever a partnership dispute. For example, if you sense that your business partner is taking your company in an unsanctioned direction, you could show the terms of your partnership agreement as evidence that their actions do not align with your original goals.

What Types of Partners Make up Your Partnership?
Pennsylvania and New Jersey state laws recognize
limited partnerships, limited liability partnerships, and general business partnerships. Each of these partnership structures comes with pros and cons for limited and general partners.

What’s the difference between a limited partner and a general partner?Simply put, general partners have a lot more to gain and lose from your partnership. They tend to get the bulk of the profits while also taking on the greatest risk of liability.

If the partnership fails, general partners would be on the hook (personally liable) for paying off the partnership’s debts. In contrast, limited liability partners are only liable for the amount they’ve invested into the partnership. Creditors can go after a general partner’s personal assets to recover their losses but cannot reach the personal assets of a limited partner.

Because general partners have a greater stake in the partnership, they often get the bulk of the venture’s profits as well as managerial control. Limited partners tend to have limited responsibilities and privileges as well as limited liability. In many cases, limited partners act as “silent partners,” especially if their primary contribution is capital investment, not expertise.

Your status as a general versus limited partner will affect your voting rights, decision-making authority, debt liability, and profit share in the partnership.

How Should You Choose Governing Law for a Partnership?
The laws that govern business partnerships vary by state. States have different requirements and processes for filing partnerships and resolving partnership disputes. You can include a “choice of law” or “governing law” provision in your partnership agreement to specify which state’s laws you wish to apply to your partnership in the event of any legal issues.

Why is a governing law provision so important? This allows you to choose a state with laws that benefit your partnership. Your choice of state law also helps make the dispute process more predictable and manageable for your partnership. You’ll know exactly which laws apply to your venture and you won’t have to deal with an unfamiliar state’s laws.

An experienced business attorney can help you structure your partnership in a way that is best geared for success on your terms. Call the Philadelphia area offices of Holmes Business Law now at 215-482-0285 or use our contact form to get your partnership started on the right foot.
<<Previous
Forward>>

    Author

    Sarah E. Holmes is a Philadelphia business attorney and strategist that helps start ups and established businesses looking to expand, protect their assets and increase their profits in an approachable, down-to-earth way.  When you're looking for a business lawyer in Philadelphia, the Main Line or New Jersey, we can help.

    Categories 

    All
    3D Printing
    3D Printing Classes
    Affordable Care Act
    All
    Amanda Steinberg
    Authenticity
    Best Business Books
    Business Agreements
    Business Breakfast Seminar
    Business Funding
    Business Lawyer Near Me
    Business Partners
    Business Plan
    Business Purchase
    Business Social
    Capital
    Certified Women Owned Business
    Charles Baudoin
    Commercial Lease
    Contract
    Copyright
    Corona Virus
    Covid 19
    Credit
    Dailyworth.com
    Disruptive
    Documents
    Due Diligence
    Employees Vs Contractors
    E-myth
    Etsy Sellers
    Finance For Women
    Food & Founders
    Forbes
    Forbes 30 Under 30
    Force Majeure
    Franchise Agreements
    Funding
    Hiring
    Honeygrow
    How Did She Do That
    How To Get Press
    How To Get Product Distribution
    How To Hire Employees
    Insurance
    Internet Business
    Lawyer For Commercial Lease
    Lease Default
    Letter Of Intent
    Llc
    Loan
    Manayunk
    Mindset
    Monica Lewinsky Speech
    Name Registration
    New Jersey Small Business Lawyer
    New Year
    Nextfab Studio
    Non Compete
    Obamacare
    Oculus Rift
    Operating Agreement
    Operating Agreements
    Owning Your Own Business
    PA Conference For Women
    Partnership
    Philadelphia
    Philly Maker Week
    Philly Manufacturing
    Resolutions
    Sara Blakely
    SBN
    Should I Quit My Job
    Small Business Advice
    Small Business Coaching
    Small Business Lawyer
    Small Business Week
    Start Up Business
    Start Up Business Reading
    Taking A Vacation When Self Employed
    Tax Season
    Trademark
    Trademark Registration
    Under 30 Summit
    Waivers
    Women In Business

    Archives

    May 2022
    April 2022
    February 2022
    January 2022
    December 2021
    November 2021
    October 2021
    September 2021
    August 2021
    July 2021
    June 2021
    May 2021
    April 2021
    February 2021
    January 2021
    December 2020
    November 2020
    October 2020
    September 2020
    August 2020
    June 2020
    April 2020
    March 2020
    February 2020
    January 2020
    December 2019
    November 2019
    October 2019
    June 2019
    May 2019
    April 2019
    March 2019
    February 2019
    January 2019
    December 2018
    November 2018
    October 2018
    September 2018
    August 2018
    July 2018
    June 2018
    May 2018
    March 2018
    February 2018
    January 2018
    December 2017
    November 2017
    October 2017
    September 2017
    May 2017
    April 2017
    December 2016
    November 2016
    October 2016
    September 2016
    May 2016
    April 2016
    March 2016
    February 2016
    January 2016
    December 2015
    November 2015
    October 2015
    September 2015
    August 2015
    July 2015
    June 2015
    May 2015
    April 2015
    March 2015
    February 2015
    January 2015
    December 2014
    November 2014
    October 2014
    September 2014
    August 2014
    July 2014
    June 2014
    May 2014
    April 2014
    March 2014
    February 2014
    January 2014
    December 2013
    November 2013
    October 2013
    September 2013
    August 2013

Vertical Divider

Holmes Business Law, P.C.

​1515 Market Street, Suite 1200,
Philadelphia, PA 19102

___________________________
40 E. Montgomery Avenue
4th Floor, Ardmore, PA 19003
​
​© 2022 by Holmes Business Law P.C.
All rights reserved.
Vertical Divider
ATTORNEYS & AREAS OF LAW 
Business Entities
Business Purchase or Sale
Raising Capital & Investor Agreements
Business Contracts
Copyright & Trademark
Hiring Employees/NDA/Non Compete
Succession Planning
Commercial Lease
The Right Start Program
Vertical Divider
BUSINESS SUCCESS TIPS 
ABOUT 
Speaking and Events
Webinars
Client Testimonials
Privacy Policy/Terms of Use
Contact
FLAT FEE PACKAGES 
New Businesses
Existing Businesses
Dispute Resolution
Trademarks & Copyright
Succession Planning
REVIEWS

​All site content is subject to copyright 2021 by Holmes Business Law P.C.
This website and its content herein constitutes attorney advertising.  Any content on this website should be construed as informational, not legal advice.  No information on this website is intended to create an attorney-client relationship.  Only a signed fee agreement between Sarah E. Holmes and the client will establish an attorney-client relationship.  Use of any information on this site is provided "AS IS" with no warranty of any kind, either express or implied.  Always consult with a licensed attorney in your own state for legal advice.
Photo used under Creative Commons from AK Rockefeller
  • Home
  • Attorneys & Areas of Law
    • Business Entities >
      • Corporations
      • Limited Liability Company (LLC)
    • Business Purchase or Sale
    • Raising Capital & Investor Agreements >
      • Promissory Notes and Debt Financing
      • Private Placement and Equity Financing
    • Business Contracts >
      • Consulting Agreement
      • Employment Contracts
      • Independent Contractor (1099) Agreements
      • Website Terms and Privacy Policies
    • Copyright & Trademark
    • Hiring Employees/NDA/Non Compete
    • Succession Planning
    • Commercial Lease
    • The Right Start Program
  • About
    • Speaking and Events
    • Webinars
    • Client Testimonials
    • Privacy Policy/Terms of Use
    • Contact
  • Business Success Tips
  • Flat Fee Packages
    • New Businesses
    • Existing Businesses
    • Dispute Resolution
    • Trademarks & Copyright
    • Succession Planning
  • Reviews