Disputes will arise in any type of business structure, from disputes among corporate shareholders to disagreements between members of a partnership. In some situations, partnership disputes can be solved relatively quickly and easily. Other scenarios may require alternative dispute resolution (ADR) options like mediation or arbitration, or litigation when ADR strategies are unsuccessful.
Whether you are currently involved in a disagreement with fellow business co-owners or you’re interested in forming a small business partnership, learning more about common causes of partnership disputes will help you prevent or handle them effectively.
Dispute Over Authority to Make Business Decisions
Many partnership disputes arise over the authority of one or more of the partners to make business decisions. Although the term partnership might suggest a business structure made up of just two people, partnerships are business entities that can be formed by two or more people. Partnerships are often preferable to new business owners who want to try out a specific kind of business idea before forming a more complex entity like a limited liability company (LLC) or a corporation. Since partnerships involve multiple owners who are partners, the issue of decision-making authority can be a primary source of disputes in the business.
Your partnership agreement, which is the governing document of the business, should clearly outline how decision-making roles work and clarify how disputes will be resolved among two or more partners. However, partnership agreements may not account for every possible situation in which partners disagree about authority to make decisions, and a legal dispute can arise.
Financial Disagreements Concerning Profits and Workload
When one or more business owners in a partnership believe that another partner or group is receiving unequal profit distributions or taking on less work for the same pay, disputes can arise.
A partnership agreement should outline how all partners will be paid and what tasks they’ll be required to perform, including specific responsibilities for passive partners who provide upfront capital but are not required to engage in day-to-day work of the business. Failing to properly specify profit distributions and workloads will almost inevitably lead to conflict. Similarly, if these aspects are clearly defined but one or more partners deviate from the agreement, the other partners may initiate litigation based on a breach of contract.
Breach of Fiduciary Duty
While disputes over authority, profit distribution, and workload may be possible to resolve through ADR options like mediation, a breach of fiduciary duty tends to be much more problematic. Business partners have a duty to act in the best interests of one another and the business, and failure to do so can result in litigation and, in some cases, the dissolution of the partnership. This scenario involves one or more partners acting counter to the established rules and spirit of the partnership and may include actions like failing to disclose important information to partners, mismanaging funds, or engaging in other illegal behavior. The best way to prevent this type of dispute is to be careful when selecting someone to form a partnership with.
If you have any questions or concerns about existing partnership disputes or preventing them through your partnership agreement, you should reach out to an experienced business law attorney.