How Can Partnership Disputes Be Avoided?

Partnership disputes are the last thing on anyone’s mind when starting out; everything is great, you all have a great new business idea, you work well together, you know who will do what, how the company will run, and you’ll never have to worry about a situation where you don’t agree on something. Hopefully, that’s the case and you’ve thought long and hard about who you should go into business with, but it doesn’t always work out the way everyone hoped in the beginning. By planning ahead with a well thought out partnership agreement, many business disputes can be either avoided or handled amicably. 

Partnership agreements are agreements between two or more partners that dictate the way a business is run and the relationship between the partners. That term will be used here to describe the relationship between multiple owners in any sort of business entity (LLC, corporation, partnership) but the formal title when you go to get one drafted may vary, for example it may be handled in the operating agreement for an LLC and in the bylaws or a shareholder agreement for corporations. 

Common Reasons for Partnership Disputes.

Many business disputes arise because the partners have different value systems or varying long term strategy and vision for where the business is going. While it may seem that this is something that would come up early, like before the company even got started, that is far from the case, and often these differences don’t become apparent until the business is up and running and in many cases successful. Here are some of the most common reasons partnership disputes come up:

  • Breach of Fiduciary Duty. Partners have a duty to act in the best interests of the company and any actions a partner may take that’s not is likely to lead to some problems with the other partners. A partner shouldn’t misappropriate company money, take business that should belong to the company and direct it to themselves individually or another business, or generally take any actions that would harm the company. If a partner does anything along these lines it almost certainly ends up leading to a dispute. 
  • How to Allocate Resources. This usually comes up in terms of how to allocate financial resources; what should money be spent on, what amount and when should it be spent? While these decisions are usually easy to make in the early stages of the company, as resources grow, or don’t, opinions change and it becomes more difficult to get everyone on the same page. These disputes can be time consuming, prevent a company from moving forward and be difficult to overcome. 
  • Work Responsibilities. This will depend on the specific setup of the partnership. In some cases a partner or partners may be more silent and just investors in the company and responsibility for the operations and management of the company doesn’t and won’t fall on them. However, many partnerships involve multiple partners who will all be responsible for the day to day operations and management of the company. Similar to other common disputes, issues around this are unlikely to come up at the start, everyone is excited about the business and getting going and fully committed. Unfortunately, that doesn’t always remain the case, and if a partner or partners start to think workload isn’t being distributed evenly or one partner isn’t living up to the expectations, conflicts can easily arise. 
  • Minority Ownership Concerns. Partnerships aren’t always created equal. It’s common for one partner to own more of the business than the others. This creates a situation where there are minority owners, and the majority owner ends up with more control over the business decisions. However, it doesn't mean that minority partners are without rights, and when majority owners forget that it ends up leading to issues and potential big disputes. 

How Can You Avoid A Partnership Dispute? 

With partnership disputes being more common that business owners recognize, it’s worth thinking about how you can avoid them in advance, and plan for how to handle them while everyone is on good terms. There are proactive steps that can be taken to help limit or handle issues when they arise. Consider the following actions that can be taken to help avoid disputes and limit their impact if they should arise:

  • Get a Signed Agreement in Place. Getting a formal, signed agreement in place should be a priority when you’re starting out in the partnership. It’s common to put this to the side as other considerations take priority, and then an agreement is never put in place. You can start taking steps with the business while working on an agreement, but it needs to be somewhere near the top of your to-do list considering what’s at stake. The form of the agreement may vary based on the business entity or the specifics of the partnership agreement, so make sure to put the appropriate paperwork in place. 
  • Consider Having a Professional Review. This probably sounds self-serving coming from a blog on a law firm website, but there is some real value in having a third party who has some expertise in partnerships review the agreement. Maybe it’s an attorney, maybe it’s someone else you know with substantial business experience, whatever the case may be, another set of eyes who brings some experience to the table can help point out potential pitfalls or gaps in the agreement. If for some reason you still have questions about anything in the agreement and how it may impact you personally, retain your own personal advisor to help work out the concerns and questions and act in your best interest.
  •  Brainstorm and Address Worst Case Scenarios. Consider all the things that could go wrong in the business - you don’t agree on how to run it, one partner wants out, one partner dies, one partner gets divorced, the business needs more money, what if one of you is just terrible at their job? These are probably difficult questions to think about but if you leave them unaddressed they could spell the end of the business. Consider all the situations you can think of, how you can address them and then put it in writing, either in a partnership agreement or other appropriate document. 
  • Allow Yourself to Walk Away if Necessary. This is easier said than done since by the time you get into conversations about how to handle potential disagreements you’re likely past the point of having flushed out the business idea and justified your reasons for why it will work. When it comes to getting set up properly to avoid issues down the road, it may be advisable to have a list of things that you consider a “must have” and can’t work without. You’ll need to have the mindset of sticking to those things no matter what, or be willing to walk away if they can’t be agreed on. While this may sound harsh, it’s better to walk away early than end up in a full blown dispute that could cost you way more than your business. 
  • These Aren’t Win-Lose Situations. If you disagree with your partners on something, don’t take the approach that it’s you against them, and a win or lose situation. It’s a partnership, you're in it together, your job isn’t to “win” or “beat” them, it’s to make the best product, or offer the best service and deliver to your customers and clients. Try to keep the business in mind and avoid heading towards the personal me vs. them. Obviously, that may be easier said than done but it’s at least where you should try to start. 


Have questions about going into business with a partner, partnership agreements or general questions about legal and business advisory services? Contact us for a free consultation. 




Search Can Businesses Require Clients & Customers To Wear Masks?
How Do I Get Out of A Contract? Search