Sunday, April 20, 2008

Partnership Gone Bad

Here is a situation that would give business lawyers a nightmare.

Partners open one business site and then decide to open another site. One partner stays to operate the original location and the other goes out to open the new site. The partner opening the new site drains the bank account, enters into a lease, and generally increases the business' debt without any counterbalancing profit.

What the partner who stayed with the original site does not know is that there are major problems ahead. Think Titanic and iceberg sort of problems.

So long as the other partner had the apparent authority for the lease, then both partners are on the hook.

If the other partner incurred debt for the business, then both partners are liable for the debt.

Liability here means that both partners' personal assets - as well as any partnership assets - are on the table to be taken by the partnership's creditors.

True, the partner who did not sign the lease or run up the bills can seek contribution from the other partner. I presume that the relationship has soured to the point that any contribution will only come after the one partner sues the other for payment of the debts they incurred.

Litigation between partners means that the business is in meltdown mode. The business stops functioning as source of profit. What money there is goes to lawyers.

I do not mean to imply that setting up as a corporation or a limited liability company (LLC) would have solved all the problems of the business. I mean only to say that some problems could have arisen and others would have been minimal.

Remember that if you are looking to start a business in Indiana or have business litigation, I am taking on new cases at this time.