How Do You Resolve a Partnership Dispute?
- February 28, 2023
- Business Law
How Do You Resolve a Partnership Dispute?
This question is one many partners face at one point or another during the life of their partnership. Disputes are inevitable, but they do not have to mean the dissolution of the partnership. There are things you can do to resolve a partnership dispute. Of course, much of this depends on the partners and the context and extent of the dispute.
To resolve a partnership dispute in Maryland or any other state in which your partnership is registered, there are two basic approaches: the proactive and the reactive. By being proactive, you can avoid many common disputes. When disputes are unavoidable, you can address them in a few different ways, each of which may render different results––the latter is critical to keep in mind, because it is also key to choosing the right way to resolve the partnership dispute.
How Do You Prevent Disputes in a Partnership?
Dispute prevention is ideal, but being proactive to avoid disputes is not foolproof; disputes will arise. Fortunately, the structure you built via dispute prevention strategies can help in the process to resolve the dispute.
Dispute prevention comes down to the partners you choose and the agreements you negotiate and execute prior to or at the start of the partnership.
Choose Partners Wisely
The purpose of a partnership is basic: it is to bring people together to work toward common goals (because working together is better than working toward those goals on their own). Part of the benefit is combining experience and sharing inventory, networks, and other resources to maximize profits and expand services. To this end, you need to be strategic about who you choose as your partner.
You cannot consider solely the resources they bring to the table. It is important to also think about how well you will work with each other. Consider whether:
- You have complementary skill sets
- You share the same or similar goals and values
- It is easy to communicate with each other
- You trust each other
- Each of you is able and willing to invest in the partnership
- Each of you is financially stable
- Each of you is able to bring in new business on your own.
The failure of any one of these can be the point of a future dispute. Imagine the case where you are the only one bringing in new clients. You may start to feel resentful. You may feel like you are doing more work and deserve more in terms of monetary compensation from the partnership. That sentiment, however, is a dispute that can lead to dissolution pretty quickly if not resolved sooner rather than later — and by sooner, we mean before you even enter into the partnership. That is where the partnership agreement comes into play.
Execute a Smart, Comprehensive Partnership Agreement
You want to be able to work well with your partners; and a way to test your working relationship is through the development, negotiation, and execution of a partnership agreement. Partnership agreements are not required in the State of Maryland, but they are strongly advised. At a minimum, they should outline:
- How ownership will be divided (e.g., 50/50, 50/25/25, 60/40)
- Each partner’s duties and obligations
- Each partner’s capital contribution
- How to address the need for future capital contribution
- Partnership compensation or profit distribution
- Liability, which will also depend on the type of partnership (general, limited, limited liability, or limited liability limited partnerships)
- Procedures for decision making
- Procedures for conflict resolution
- Procedures for dissociation
- Procedures for termination
- Procedures for dissolution.
Being proactive about potential disputes in a partnership can go a long way in ensuring your partnership is a successful and mutually beneficial one. In lieu of a partnership agreement, however, the rules and laws of Maryland apply, including Title 9A of the Maryland Corporations Code. These rules may or may not favor your partnership.
At Lusk Law, LLC, we have been working with business clients for more than a decade, and our business law practice benefits from the insights we have gained throughout all these experiences.
One important insight that we cannot stress enough is this: If starting a partnership, a smart, comprehensive partnership agreement is instrumental. You can think of it as your competitive advantage, because it is the foundation from which your partnership will grow. Without this foundation, you start off on a rocky surface.
How are Disputes Settled in a Partnership?
Whether or not you chose your partners wisely or executed a strategic partnership agreement, when a dispute arises, you have legal options to deal with a business partner.
First Option: Talk it Out
This option is always preferred over any other option, but it also underscores the importance of choosing the right one with whom to partner. If you work well together, chances are you can talk out the dispute. Of course, several factors may impact how viable this option is, like the subject (e.g., finances, intellectual property, authority, business objectives, etc.) and extent of the dispute.
Potential Option #1: Negotiation
If you cannot talk it out, then negotiate. Negotiations are more formal than sitting across a table and hashing over the problem. You may opt to have a business law attorney represent your interests during the negotiations, which can be a more efficient way to negotiate. A seasoned business law attorney can help you focus on solutions rather than the problem.
Potential Option #2: Partnership Agreement Amendment
Depending on the dispute, sometimes it is a matter of amending the partnership agreement. That’s why, in part, it is important to have a business law lawyer well-versed in partnerships to draft and negotiate partnership agreements, so that, from the very start of the partnership, partners agree on duties, responsibilities, compensation, and all other critical aspects of their partnership. You do not want a do-it-yourself agreement where the language is general and non-specific to your partnership needs.
Potential Option #3: Mediation and Alternative Dispute Resolution
If you have a partnership agreement, you should confirm what it says about partner dispute resolution. Mediation or alternative dispute resolution are often requirements, and for good reason. Mediation is voluntary and non-adversarial and facilitates solutions by using a neutral mediator to negotiate with the parties until or in the hopes that they come to a mutual, voluntary conclusion. Alternatively, arbitration may be used, which is more formal and keeps the dispute out of court but results in a final, involuntary result.
Potential Option #4: Litigation
When negotiation and/or mediation fail and arbitration was not used, you may opt to litigate. Litigation is common when a breach of contract has been committed or a partner fails to fulfill a fiduciary duty and the other partners want to sue to recover compensation for financial harm. If there is a partnership agreement, it may outline when litigation is appropriate. You may want to consult with a business law attorney to confirm that litigation is now your best option.
Potential Option #5: Partner Buyout
Litigation is not always the final answer, and a partner buyout may be the most effective option. Partner buyouts, though, can be complex. Sometimes, the buyout can occur without interference of the partner causing the issue, while at other times the process may require dissolution and reformation of the partnership.
Potential Option #6: Dissolution
When all options that would have allowed the partnership to survive have been exhausted, dissolution may be the only way to settle a partnership dispute. Dissolution means the end of the partnership, and so you will have to register as a new entity upon dissolution if you want to restart your business.
Before you re-register as a partnership, however, you may want to speak to an experienced business law lawyer to confirm which type of business entity is best aligned with your business goals. It may be that a partnership still works, but instead of a general partnership, maybe a limited liability partnership offers more benefits. On the other hand, maybe creating a corporation is in your business’s best interests.
Avoid Partner Disputes Today by Contacting a Seasoned Business Law Attorney in Frederick, MD
At Lusk Law, LLC, we build strong, long-term relationships with our clients, which helps us create a deep understanding of our client needs. Part of this process is helping our clients be proactive to avoid disputes. When disputes arise, however, we are well-equipped to address them efficiently and effectively.
As always, we remain advocates for life’s obstacles and opportunities, and this is true for our business clients creating partnerships in Frederick, Maryland, and throughout central Maryland. Call us today at (443) 535-9715 to schedule a consultation and to get the legal advice and representation you need to succeed.