Disagreements between business owners can escalate into disputes that threaten the future of the business and the health of the company. The legal structure chosen during the business formation stage is important when it comes to navigating successful dispute resolution. Unfortunately, business owners choosing between different structures (e.g., partnership, limited liability partnerships (LLPs), limited liability companies (LLCs), and/or corporations) may be tempted to choose a partnership because these entities seem simpler and require less upfront paperwork. Some partnerships may be sealed between partners with only a verbal agreement and a handshake.
New business owners do not always consider the problems that their companies are likely to encounter. Business partners may clash over how a business is run or how its resources are allocated. Their venture may fail, or there may be allegations of fraudulent activity. There may be fights among members of a family-owned business, and partners may disagree about the vision for the future of the business. In these cases, the informality of verbal or handshake-type partnership agreements means there may not be an established process for resolving disputes. Partners in a general partnership, unlike members of an LLC, limited partners in an LLP, or shareholders in a corporation, are personally liable for business debts. In this context, disputes between partners can pose a very real threat to the financial health of all parties and entities involved.
Partnership and LLC Disputes: Prevention
Partnership and LLC disputes are easier to resolve when the parties adopt a detailed business formation agreement from the start. The agreement should define the conditions of the business relationship and define key terms such as:
- Roles of each partner or member
- Expectations of each partner or member
- Controlling stake of each partner or member
- Amount of capital contributions each partner or member must make
- Means partners or members will use for making their capital contributions
- Process for making decisions affecting the business
- Conditions under which a partner or member may be removed
- Terms under which a partnership or LLC may be dissolved
Establishing these terms means there is more potential to resolve a business dispute internally. When a dispute arises, all parties can refer to the process defined in the agreement as they work to resolve it.
Partnership and LLC Disputes: Resolution Without Dissolution
Resolving a partnership or LLC dispute to the satisfaction of all parties can be essential to preserving the relationship and the ongoing success of the business. When disputes cannot be solved internally, business owners should consult a partnership or LLC dispute attorney who can more effectively negotiate and work toward a settlement with the opposing party. A skilled partnership or LLC dispute attorney also can facilitate the mediation and/or arbitration process, which can be quicker and more cost-effective solutions than attempting to litigate a partnership or LLC dispute.
Where possible, it is advisable to solve a partnership dispute without resorting to dissolve the partnership or LLC. A partnership or LLC dispute attorney can present a suite of options to partners or members for resolving the disputes—whether this means negotiating the buyout of a partner or member, a sale of the business to new owners, or a freeze-out merger. In some cases, the only way of resolving the problem will be to dissolve the company, to declare bankruptcy, and/or to pursue litigation.
Partnership or LLC Disputes: How We Can Help
The business litigation attorneys at Payne & Fears have spent years helping business owners protect their interests. Along with our corporate transactions practice group, we regularly counsel clients on their options for business formation and can help clients choose the best entity to meet their business needs. When a dispute arises in a partnership or LLC with an agreement in place, we help clients interpret and implement the terms of the partnership agreement as written. We explain to clients their legal rights and their resolution options. Additionally, our partnership and LLC dispute attorneys can handle negotiations so that communication between all parties remains professional and productive. Where the problem can be resolved through negotiations, mediation and/or arbitration, or changes to the agreement itself, we help to achieve these results quickly and efficiently.
We work to avoid litigation over partnership and LLC disputes wherever possible. Pursuing civil litigation for a partnership or LLC dispute may mean a lengthy and expensive process that leaves all parties with lingering resentments. That said, sometimes business partners cannot resolve their problems and continue to work together productively. In those circumstances, the partnership and LLC dispute attorneys at Payne & Fears are ready to protect our clients’ interests in court, whether at the state or federal level.