Most Common Reasons for Partnership Disputes and How to Resolve Them
Business relationships, just like any other relationship in life, have their ups and downs. A partnership can start with a close friendship and similar visions and goals for their business, but as the business evolves, partners will start facing differences and decisions that set them apart.
That’s why no matter how strong a partnership is, disputes are bound to happen – and when they do, you should be prepared and know how to resolve the issues.
This article will discuss some of the most common reasons for partnership disputes and ways to resolve them.
Financial disputes are one of the top causes of partnership disagreements. Many business attorneys who represent warring former partners observe that these disputes often arise from day-to-day management of the company, such as how money should be used or allocated, or when a partner starts mixing personal expenses and errands with business ones. The disputes always worsen when the company undergoes financial difficulties, as the question of each partner’s liabilities and profit distribution will turn into a disagreement if it is not clearly stated in the partnership agreement. This can end up causing legal disputes between the two partners, which can end up destroying the partnership and the business.
To avoid these disputes, it is very important to make the ownership rules clear from the start. This includes clear indication of how much time and effort each person is putting in and how much he or she is getting in salary as a reflection of that work; having details of the profit distribution covered in the partnership agreement; and enforcing tighter controls of money disbursements and expenditures by having both partners approve expenses before payment.
To avoid these disputes, it is very important to make the ownership rules clear from the start.
Intellectual property is another sensitive subject that often leads to partnership disputes. These disputes will usually revolve around a partner making the case that he or she owns the intellectual property that the company is using, and the company claims that the intellectual property belongs to the company as an entity and not to any individual partner. Legally speaking, if an individual owns the intellectual property (IP) but allows the company to use it without documenting it, the individual might risk losing their IP rights and the court can rule that the IP belongs to the company.
To prevent such disputes from happening, the IP owner should take steps to show that they own the rights by having clear documentation from the start. If a dispute then results in these rights, the IP owner can revoke the company’s licence. This documentation and implemented rules will help prevent unforeseen issues down the road.
Another type of dispute that often takes place in a business partnership is each party’s authority in the company. Usually, each partner will be in charge of specific areas. For example, one will handle the company operations, while the other overlooks the company’s financial matters. Without a clear separation of duties, partners can overstep their boundaries and believe their ideas are the best, without respecting the other person’s expertise. One partner may think it is important to spend more money on marketing, while the other insists on improving production and unit cost. These disagreements can delay company processes, and hinder a company’s performance and growth potential.
It is crucial to draw a line on the areas of authority and set a chain of command to ensure everyone respects and follows these rules. This will sometimes require you to sit down with your partners from the start and decide who will make what decisions.
Company Objective Disputes
Once a company reaches a certain level of development, partners may have differing ideas on how to take the company to the next level. One partner may want to invite foreign investment or pursue M&A opportunities, while others want to keep it strictly domestic or family-owned. These disagreements on the direction of the business can be serious and change the company’s future completely. There is no good way to prevent it except for discussing it thoroughly with your partner in different case scenarios, evaluating the risks and opportunities for each direction, and making the decision together.
Just as a married couple that goes through difficulties and ends up finding a divorce attorney to resolve their issues, sometimes partnership disputes also have to seek professional advice as the parties cannot resolve the differences by themselves. To prevent a fall-out in a business partnership, it is most important to maintain an open and frank dialogue with your partners from the start on issues of authority, money distribution, ownership rules, and rights to intellectual property. Minimising the possibilities of disputes is the best way to ensure a business will run smoothly and successfully.