Most people cannot proceed in life without trusting others, but it is not recommended for people to enter into joint financial arrangements without first doing background checks and possibly putting protective measures in place. It may be tempting to wholly trust a business partner you have known for a while and know to be a standup person, but, even in this situation, not performing due diligence could end up costing you.

Why Protection Is Needed in Any Type of Financial Arrangement

As virtually any seasoned business attorney will tell you, they have yet to discover a person with a perfect halo. Therefore, everyone needs protection when entering into a financial arrangement.

It is not uncommon for someone to partner with someone else in a business venture or transaction only to find out that their trust was misplaced. It is important to note that it does not have to be a business transaction, per se, but usually involves some kind of financial deal in which you are not the sole player.

Unfortunately, some people find out the hard way that trusting someone  else with money or carrying their share of financial liability may lead to disappointment when the other person fails to live up to your expectations.

Some of the situations in a financial joint venture that can occur without protection include:

  • One financial partner running off with a bunch of the money and leaving their partner to face debts and liabilities alone
  • Both financial partners taking out a loan for their business or a mortgage on real property, but when the business tanks and the bank or lender contacts you for repayment, one financial partner takes off, leaving the other to pay off the loan or mortgage by themselves
  • One financial partner takes the business in a new direction without an agreement in place
  • One financial partner wants to start their own business using company assets like equipment or customer contacts and there is not a non-compete agreement in place

The question then becomes, how you protect yourself from something like one of the above taking place?


What You Can Do to Protect Yourself

While it can be true that to get by effectively in this life, you have to trust people, there are still steps you can and should take to protect yourself. It is possible to trust a person and still have a remedy in place should that trust fail. No one wants to end up partnerless and owing a substantial amount of money to the IRS, a bank, or some other third-party creditor because they misplaced their trust.

It is highly recommended that an individual entering into a financial joint venture proactively address remedies for potential issues. It is recommended to do a deep dive into the potential partner’s history by:

  • Learning who they have previously dealt with
  • Discovering what their past consists of
  • Talking to people they have previously worked with
  • Finding out if they are convicted criminals
  • Identifying if they have been sued before
  • Discovering if they have ever declared bankruptcy.

It is also critical to make disclosures. In other words, identify what it is that you want the other partner to do. It is necessary to have whatever it is the person is promising in writing. It is advisable to seek a lawyer for this step in the process. A business attorney can ensure those promises and expectations put in writing are enforceable

Additional practices to consider when entering a financial transaction with another person include:

  1. Have audited financial statements for your company
  2. Establish other people to watch over the business and oversee it (instead of entrusting it all to one person)
  3. Be an active partner, as silent partnerships where one person supplies the money and the other person does the work can be unstable at times
  4. Put non-compete and confidentiality agreements in place
  5. Consider worst case scenarios and put in provisions that detail explicitly what may happen if one person breaches their agreement


Are There Exceptions to the Rule of Protection in Financial Joint Ventures?

The short answer is that there are no exceptions to the rule of protection in financial joint ventures. Everyone needs protection because there is no way to anticipate what could happen a few weeks, months, or years down the road.

For example, let’s say you want to enter into an agreement with a good friend from college that you have known for years. Should you still take proactive measures to ensure your protection? Yes, and even though you know the person, you should start by looking into their history.

It is necessary to think of all the possible implications. If the friend is creative and a hard worker, that is fantastic, but they may not have any money to put up in the joint venture. If this friend will need to sign a guaranty or co-guaranty on something like a million-dollar debt, it may simply amount to a good gesture that may be worthless if there is a default.

Harsh as it can seem to take steps to protect yourself against long-term friends, it is essential.


Can You Ask Someone to Get Bonded?

If there is a deal for which there is a market that would be bonded (like a construction contract), yes, you can ask someone to get bonded. The way this works is that there is generally a bond or amount of money that is promised and put up by a solvent surety, such as a bonding or insurance company. These entities do this in exchange for getting a fee and will put money up to secure something that a party is supposed to do.

There is no fixed amount for bonding. Sometimes it can be a flat fee like ten percent of a bond, or other times it may require putting up collateral equal to the amount of the bond.

If a bond is in place and the deal does not go through, the impacted party can simply have the surety cover the liability instead of having to chase the other person’s assets. The bonding company, who typically has a good deal of money, can come forward and finish the project. However, the bonding company may in turn sue the person who broke the deal.

When it comes to protecting yourself in a financial joint venture, hire an attorney, and together be sure to get written agreements in place, get an understanding, make plans for oversight, do thorough background research, and keep up with what is going on in the business. These are the best alternatives to blindly trusting someone when money is involved.

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