Many new and emerging businesses are run by one or more people in a relatively informal fashion. Unless and until these business relationships turn into limited liability companies (LLCs) or corporations, or take on some other formal structure, they will continue on as partnerships.
Precisely because these partnerships have little formal rules, disputes that arise between partners can be confusing and very complicated. Avoiding them is crucial, but even the most understanding partners and the smoothest-running business can devolve into disputes that dissolve the partnership. The commercial litigation attorneys at Kim & Feliz, LLC can ensure your rights and interests are protected in these stressful times.
How Partnership Disputes Happen
Every business is different, with different sources of income to types of inventory to a different customer base. Partnership disputes are similar because there is no telling what detail will cause business owners in a partnership to disagree with each other, even among partners who rarely seem to agree on anything. When a dispute arises between friendly or cordial partners running a smooth business, it can blindside everyone involved.
However, there are some big-picture trends that lead to partnership disputes. When not resolved quickly or amicably, these disputes can lead to mediation, arbitration, or even towards costly litigation.
One of the more serious issues that can arise between business partners is the discovery of fraud. If one partner finds out that their associate is defrauding them and has taken thousands of dollars in value, the resulting dispute is strong and likely to spread.
A more common instance of fraud in a partnership, though, is when one partner discovers that their associate is not defrauding the business but rather the customers that the business deals with. The discovery can put the partnership in a tricky position where the upstanding partner either has to go along with the fraudulent activity, turn a blind eye to it and ignore it, or take action to make it stop. In any course of action, the dispute is likely to harm the partnership and put your interests at risk.
It is usually when a partnership is not running well that issues begin to arise – lucrative businesses that satisfy everyone tend not to create much turmoil. When things have gotten so bad that the partnership is about to collapse and dissolve, every partner involved will begin thinking about the end game and trying to escape with as little damage as possible. In many cases, this involves shifting liability onto one of the other partners.
The resulting dispute is often intense and dangerous for each partner still on board.
Breach of Fiduciary Duties
In many cases, partnerships are complex relationships where some people are supposed to be acting in the best interests of someone else. While this is more common in other corporate structures – like an LLC or corporation, where there are officers like the CEO who act on behalf of the shareholders or board of directors – a similar relationship can exist in partnerships, as well.
In these cases, the people who actually make a decision for the business have a fiduciary duty to put the interests of others ahead of their own interests. If they fail to uphold it, they can breach their fiduciary duty.
Unfortunately, if you think that one of your partners has a fiduciary duty to you and is breaching it, you will have to overcome the business judgment rule, which protects actors who do something in good faith and acted reasonably.
Claiming that a business partner is breaching a fiduciary duty, therefore, is bound to create a partnership dispute, even if it is clear that you are correct.
One of the key parts of a partnership dispute is to keep it from dissolving the partnership. Most disputes can be overcome, even if things have gotten so bad that you and your partner can barely work with each other. It just might take some creativity in crafting a solution that everyone can recognize as a good way of keeping the partnership alive and getting it to prosper once again.
Dissolution of a Partnership
However, if you and your business partners have been disagreeing for some time and feel that the time has come to split ways, dissolving the partnership can be your next step.
Ironically, once the decision has been made to end a partnership and plans are being made to execute the dissolution, many partnerships are revived precisely because those involved come face-to-face with the enormous complexities that come with severing business ties. In some cases, partners have to decide what to do with existing inventory, accounts payable, and liens and liabilities. The headaches that these decisions create can sometimes be enough for struggling partners to put their heads back together and come up with a solution that keeps the partnership alive.
Other cases, though, are easier for partners to split apart, or have such deep-seated resentment built up that partners are willing to deal with the difficulties of a dissolution instead. In these situations, partners should be aware of the fact that their co-owners are likely to try escaping from the partnership with as little liability as possible. Protecting yourself from these tactics is essential and often takes an experienced team of lawyers to navigate these complex matters.
Commercial Litigation Attorneys at Kim & Feliz, LLC
Partnership disputes can doom even the most smooth-sailing business. While you may focus your attention on the survival of the business, your partner might be more worried about their own personal stake in the venture and try to get out while they can, taking with them the partnership's gains and saddling you with its liabilities. Protecting yourself in these situations is the most important thing that you can do.
The commercial litigation attorneys at Kim & Feliz, LLC can help. By representing business clients in the past, we have come to know how partnership disputes can be resolved, how they can doom a business, and how partners can get thrown under the bus. Contact us online or at (201) 585-2250 for legal help in this tricky time.