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Protecting Your Assets from Partnership Litigation

by | Sep 9, 2015 | Business Law


When business relationships become strained due to poorly performing investments, low or decreasing property values, financial stress, etc. the happy partnership can become a badly frayed one very quickly. It can even be the means of bringing down a long time friendship turned partnership. Financial pressure can break down the trust, collaboration and cooperation that kept partners together for years.

Top 5 Lawsuit Liability Mistakes:

  1. Setting up a business as a sole proprietorship or partnership.
  2. Holding real property in your own name.
  3. Lack of (or ineffective) employee/HR policies.
  4. The existence of unprotected assets.
  5. Projections (the appearance) of wealth.

The only sure fire method of protecting yourself from business liability and disputes amongst partners is to protect your assets before it happens. The above common list of mistakes occurs repeatedly throughout the various clients we work with at The Law Office of the Law Office of Ernesto Aldover. They can cause or drastically worsen a legal situation. No matter how many times we see it happen, it’s always difficult to watch a client suffer through a legal battle unnecessarily. It’s even worse when we can see that the outcome would have been much better for our client had there been some proactive asset protection planning in place to reduce the likelihood of being sued. The easiest way to put proactive asset protection planning in place for your company is to consider the most common lawsuit “drivers.”

Operating a business as a partnership greatly increases the likelihood of a lawsuit. It tops the list of business owners’ mistakes that lead to lawsuits/litigation. The business partnership is a common source of lawsuits due to the eventual breakdown of the partnership. As litigation attorneys, we’ve heard every complaint in the book about business partners:

They’re not working hard.

They take excessive loans from business funds.

They’re in breach of contract.

They’re in breach of fiduciary duty.

They’re committing fraud.

Business partner disputes do not have to happen in the form of a legal partnership, it can simply be two friends or family members working together. It can be an oral contract leaving two people partners. In almost any business partnership, there is an obligation between the parties. Each owes the other certain obligations. Any litigation will involve partnership law (i.e. California the Revised Uniform Partnership Act governing business partnerships, established in California Corporation Code).

Law does not require that there be a formal, written contract to create a partnership. There are minimum partnership obligations set forth in the Uniform Partnership Act that govern when the written contract is absent (although when there is a written agreement in place, some of these obligations can be altered).

Fiduciary duty to the business relationship applies to both partners. Breach of fiduciary duty is a common cause of lawsuits. Generally speaking, this cause of action starts when a partner acts in bad faith towards their other partner/s or takes advantage of an opportunity for their own personal gain (i.e. hoarding clients, competing with the partnership, side deals with vendors, branching off an creating another business, involvement in unfair financial activity, etc.)

Another major destroyer of happy partnerships is breach of contract. Whether the contract if written or based on an oral agreement, anytime one party breaks a promise or basic loyalty or good faith duties, it can be considered a breach of contract.

The last major destroyer of business partnerships is fraud. Fraud is one of the most extreme allegations and involves alleged misrepresentation, deception or concealment.

If you need assistance with partnership disputes, contact the southern California business attorneys at The Law Office of the Law Office of Ernesto Aldover.