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How can business partners avoid financial disputes?

On Behalf of | Oct 21, 2020 | Business and Corporate |

In the business world, finances are one of the most common sources of disputes. Minor disagreements over how to use funds can quickly develop into larger issues that may require litigation.

Financial disputes might be common, but they are usually the last thing that business partners want to deal with. So, here are three things partners should consider to prevent such disputes from putting their business at risk.

1. Ensure partners understand their fiduciary duty

California law is clear about the duties that business partners owe each other in a general partnership. These include:

  • A duty of care, which means partners must act in good faith and avoid negligence
  • A duty of loyalty, which requires partners to avoid conflicts of interest, or using business finances for their own gain

Violating these duties often leads to much larger issues, such as potential criminal charges. However, understanding these duties under the law before entering the partnership is critical.

2. Discuss salaries as soon as possible

In many cases, partners might divide duties by talent. One partner might manage business operations while the other manages finances.

This is a common arrangement, and it works well for many partners. Even so, partners should make sure they discuss how they will allocate financial resources. This is particularly critical when it comes to their salaries.

For example, Business News Daily suggests that business partners should evaluate their responsibilities to determine their salaries fairly. However, partners must make sure they agree on these salaries and the allocation of funds.

3. Create a process for making financial decisions

It is also beneficial for business partners to establish a strategy they follow when making financial decisions. For example:

  • Partners must confer with each other before major purchases, bill payments or decisions
  • They should regularly review financial records together to address concerns proactively

Following the same procedure for all financial decisions can help prevent disputes or other serious financial issues from developing within the business.

Business partners will not always agree, but mitigating financial disputes before they arise is critical. That is why creating an agreement addressing all of the financial factors is an important step in every partnership.