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Protecting your business from a breach by a partner

On Behalf of | Jan 5, 2023 | Business Organizations

Most every business partnership starts out with amicable relationships between or among partners and with everyone committed the same goals. However, a lot of things can happen over time. Sometimes it’s necessary to cut a partner loose.

While it may be unpleasant to think about these things as you start your business or welcome a new partner, you need to plan for the unexpected. Some people balk at prenuptial agreements because they believe it’s just “planning” for an eventual dissolution of their marriage. However, these agreements help things go more smoothly if that happens.

While that’s not a perfect comparison, partnership or operating agreements need to have provisions that set expectations for partners and make it clear under what conditions a partner may be required to step down and potentially be subject to legal action. Let’s look at a few examples.

Breach of fiduciary duty

This is one of the most egregious breaches possible by a partner. It typically involves someone who acts in their own interests rather than those of the business, as they’re obligated to do. This can involve stealing, making side deals and any number of other actions.

If you have evidence that a partner is doing this and causing financial or other harm to the company, the other partner(s) can sue them for breach of fiduciary duty if they can show evidence that the breach caused damage to the company. Typically, these legal actions seek economic damages. However, if fraud or malice was involved, you may be able to seek additional punitive damages.

Other breaches that can warrant legal action

Depending on how the agreements are structured, you may be able to take legal action for a number of other breaches, including:

  • Breach of non-compete agreement
  • Breach of non-disclosure agreement
  • Abandonment or desertion

The more detailed and clear your partnership and other agreements are, the less likely it will be that someone will feel like they can take action that could harm the company without paying a price for it. If they do, you’ll have an easier time holding them accountable and recouping your losses. This is just one reason why it’s crucial to have experienced legal guidance when drafting and enforcing the terms of your agreements.