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How To Protect Yourself In a Business Partnership

By Adam Ramirez | Last updated on
Guest post by Jennifer K. Halford, Esq. Many small business owners chose to operate as a general partnership. In my experience, however, few business owners know how to protect themselves in their partnership. The following are a few things that you can do to protect yourself in your business partnership.

Have a written partnership agreement

Protect yourself from the actions of your partners by having a written partnership agreement. Many small business owners are reluctant to ask their partners to sign a written partnership agreement, especially if their partners are family members or friends. They are afraid that they will offend their partners or they insist that a written agreement is unnecessary. I have found, however, that clearly defining the roles, expectations, and ownership interests of all partners can prevent future disputes and heartache. The partners know in advance what will happen if there is a dispute and how it will be resolved.

Shield yourself from partnership debts

Protect yourself from the partnership's debts. Your written partnership agreement can limit the amount of debt one partner can tie the partnership to without the consent of the remaining partners. Otherwise, any one partner can legally bind the partnership to a business agreement or debt. And if the partnership is unable to satisfy the debt, you can be held personally liable. Additionally, make sure that the business has sufficient capital to cover its liabilities, and invest in a good insurance policy. I often hear that a business owner doesn't have the extra capital to invest in insurance. Yet, next to prudent business practices, a good insurance policy is the best defense for a general partnership.

Have an exit strategy

Protect yourself by having an exit strategy. Your written partnership agreement can set forth what happens if a partner dies or chooses to leave the business. The remaining partners can be given the ability to buy the withdrawing partner's interest. Agreeing on the buy-out terms before they are needed will ensure that the terms are fair. Jennifer K . Halford is an attorney whose practice focuses on business law and estate planning. She is also a professor at California State University, Chico, where she teaches Entrepreneurial Law. If you haven't started your business yet, you can complete business formation documents from home with simple, DIY options customized for your state.
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