Causes of Partnership Disputes

What Causes Business Partners to Battle it OUT and Pack it UP?

A business partnership is a complex relationship. No matter how solid the relationship may seem, partnership disputes still occur in almost every partnership. Partnership disputes are the most common type of business disputes. A business partner dispute is very disruptive to the day-to-day activities of the business and can cause an otherwise successful business to fail. Even where the business is grossly successful, partnership disputes are inevitable, there’s no question about it. The Question is, will your business survive the partnership dispute?

Financial obligations and a weak or completely missing partnership agreement are the main causes for partnership disputes. This usually happens when the business is in flux; either experiencing financial problems or growing quicker than anticipated. The following are the most common causes of partnership disputes:

1. Misappropriation of business assets or property

Misusing assets for personal use can cause a clash between business partners. But perhaps there is a disagreement as to what is acceptable? Maybe one partner thinks it is perfectly fine to use the company car to do grocery shopping, but the other does not. Or perhaps one partner thinks it is perfectly fine to “borrow” $2,000 from the business to cover his mortgage for the month, after all, “it’s their money, too”.

2. Responsibility and authority are not delineated

If there is no set chain of command, authority or responsibility for each partner, you will quickly run into two issues; some things will not be getting done by anybody, and other things won’t be getting done because multiple partners will be sticking their nose in it. Without set responsibility, authority and a chain of command, who can really be held accountable for anything?

3. General disputes about how to utilize partnership resources

Disagreements on how to use partnership income to promote the business and what expenses should be incurred by the business are common. Perhaps one partner wants to advertise on a billboard while the other thinks radio is better. One partner thinks they need nicer offices, while the other would rather slum and make more money. Should we lease vehicles under the business? Pay for cell phones? Offer health insurance? Disagreements on the small things quickly turn into big problems.

4. Misappropriating “business opportunities” that belong to the partnership

Misusing business opportunities that belong to the partnership can aggravate business partners. This happens often when partners do “work on the side” but within the same industry. Common with mechanics and contractors, one partner trying to turn a partnership lead into a “side job” can quickly cause conflicts of interest and angry business partners.

5. Workload imbalance

The amount of work one person can handle in limited. Strength comes from numbers. After all, that’s the entire point of a partnership! But when one partner is bearing a larger portion of the workload burden at any given moment, the underlying relationship can be strained. Sometimes this is due to the actual abilities of each partner, where more work of one type comes in than another. Other times it is due to the evolution of the market, where only that type of work currently exists. If there is no mechanism in place to spread the burden, issues can arise.

6. Disagreements on company objectives

One business partner has one objective while the other business partner has another direction in mind and they can’t seem to agree on one direction for the company. As much as the small things matter, the big picture is often more important. If partners cannot agree on a direction to head in, the business could get split in two.

How Do You Avoid Partnership Disputes?

Proper planning is the way to avoid partnership disputes. By having a partnership agreement and being advised on common issues that can talked through and decided, problems are stopped before they even occur.

If you are dealing with a partnership dispute, we encourage you to discuss your case with our business attorney. Whether you want to work to resolve the partnership dispute or you want to terminate your partnership, our attorney will work on your behalf to prepare the proper documentation and make sure your best interests are protected.

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A Properly Drafted Business Agreement Can Add Health to Your Company

Agreements Between Business Founders

When beginning a new business venture, most entrepreneurs have a handle of the importance of properly forming a business in terms of selecting a business structure such as a partnership, a limited liability company or a corporation, and filing with the State to gain legal existence.

A much smaller group understand the importance of having a partnership agreement, operating agreement or shareholder agreement between company founders. I have seen a few situations where the lack of such an agreement has caused struggle between business founders, even leading to failure of that business.

Business founders need to budget some cost for a basic agreement to document terms such as ownership structure and rights, voting and decision-making rights, management responsibilities, and buy/sell provisions or rights of first refusal when one founder decides to make an exist, among many others. Having a well drafted agreement that brings up major points the business founders have not even consider is very important and can save a lot of time and money in the long run.

An agreement is no guarantee of business success or that issues between founders will not arise. However, having an agreement in place that is specific and decisive can squash many smaller issues before they grow into bigger problems.

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