Many businesses fail, and many business partners go their separate ways, but not every business divorce ends in litigation. There are certain things that you can do now, whether your business is thriving or just starting, to prevent a dispute with your partners or investors from landing everyone in court.

1. Start with your operating documents.

When I sit down with a client who is having problems with his or her business partner, the first thing I want to do is see the operating documents. For a corporation that is the shareholder agreement, and for an LLC that is the operating agreement. What am I looking for? Good operating documents will clearly and plainly define the responsibilities of each of the members of the business. They will explain who makes the decisions and establish tiebreakers in the event of a split decision. They will also explain how the assets of the company—e.g., money, real property, intellectual property—will be split up when the partners split up or the business is dissolved.

2. Be transparent.

All partners should have a clear picture of basic information like assets and liabilities, profits and losses, and compensation. Partners should also understand how decisions are made and who makes them. Murky finances and hidden compensation can cause business partners to distrust each other. Partners should understand who is making the key decisions so that they know who to talk to if they disagree with the decisions that are made. Although not a matter of transparency, it is also good practice to make sure that compensation is roughly proportionate to responsibility so that those with the most responsibility are not the least paid. Talking to an accountant about establishing internal controls and standard operating procedures is often helpful in addressing these issues.

3. Be careful about partners you don't want.

It may be your idea and your sweat equity, but if you are not careful it may not remain your business. If you are raising money by selling a share of your company, understand that those who buy part of your business may want or even be entitled to a say in how the company is managed. Selling a share in your business may also trigger rules and regulations that apply to the sale of securities. Be careful not to end up with partners you don't want, or that you don't need. If you are acting like business partners the law may treat you as business partners. For example, if you and a friend sell assets together and then share the profits, you may now be “partners” in the legal sense of the word even if there is no written partnership agreement.

4. Consider whether any non-competition or similar agreements apply.

Companies often have non-competition and non-solicitation agreements that may apply when partners are leaving a business. Non-competition agreements prevent former employees from going to work for competitors in the same area, and non-solicitation agreements prevent former employees from going after former customers. These agreements usually allow the former employer to seek a court order prohibiting the former employee from working for a competitor or soliciting customers. It is also common for these agreements to allow the former employee to seek its attorneys' fees from the former employee. Because these agreements risk a court order prohibiting an employee from working for his or her new employer and ordering that employee to pay attorneys' fees, it is wise to consider whether any such agreements apply.

5. Look before you leap.

Litigation can be inevitable. Before you move in that direction review your operating documents for key provisions like a clause requiring the parties to arbitrate disputes or a section choosing where the litigation takes place or what law applies. Arbitrations occur before private judges that the parties hire and pay for and typically remain confidential. Court proceedings are public and often make good copy. Also pay attention to what law applies because on some topics there are significant differences in the law between nearby states, such as New Hampshire and Massachusetts. These provisions will help you evaluate the potential costs and benefits of litigation. Similarly, making choices early about where to litigate or what law will apply may place you in a better bargaining position later on.

Finally, understand the difference in cost and leverage that carefully drafted documents and early advice can make. It isn't always the most expensive changes that make the biggest difference. Sometimes a few extra paragraphs in an operating agreement can mean the difference between drafting a letter and drafting a lawsuit.

I am pleased to partake in the “Ask-the-Expert” series and look forward to answering your questions and/or responding to your comments about this or related topics at abihub.org/ask-the-expert/.

Ned Sackman is an attorney in the Business Law Practice Group in the Manchester office of Bernstein Shur P.A. He focuses his practice on intellectual property counseling and litigation. He has published articles and given presentations on protecting intellectual property, and represented clients in intellectual property disputes in courts throughout New Hampshire, as well as argued in the New Hampshire Supreme Court. He lives with his wife and two children in Concord.