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What should you do in case of a partnership or member dispute?

A business partnership or limited liability company is a go-to for many entrepreneurs or experienced business owners. They say, “Two heads are better than one” and are not wrong. More people mean more resources, knowledge, experience, and ideas. But what happens when not everybody agrees to the same ideas? That is when disputes arise.

Common sources of partnership disputes

Breach of fiduciary duties

Breach of fiduciary duty occurs when a party is responsible for acting in the interests of another but fails to do so or does so dishonestly.  An example would be if a manager of an LLC diverts business opportunities belonging to the LCC to another company from which they profit. 

Some common cases of a breach of fiduciary duty are:

  •         Misappropriating company funds or assets;
  •         Dishonesty in dealing with other partners or members;
  •         Taking a business opportunity away from the partnership or LLC for their own benefit.
  •         Competing with the company.

Disagreement over the future of the company

When partners have different visions for the company, they might fail to work together efficiently. If this happens too often, tension may rise, and conflict is imminent.

A Bad Way to Start a Business

Merely shaking hands on an agreement with other owners of the company is the most risky way of starting a business.  Oral agreements of this type invite litigation later on if a dispute between the owners should arise.  A well-written partnership or operating agreement reduces the areas of potential conflict and ultimately the expense that will be involved in resolving disputes. 

A Partnership or Operating Agreement

A business partnership or operating agreement is a legal document that outlines the rights and obligations of the partners or members of the business.  It can be considered “the bible” for the company, spelling out precisely what will happen if various issues arise. The agreement is signed by two or more parties who decide to carry on business with a view to profit. This document generally outlines:

  •         Each individual’s ’ responsibilities and obligations;
  •         Decision-making authority;
  •         Capital contributions and distributions;
  •         Disposition of business property;
  •         Each individual’s ownership interest

A properly written partnership or operating agreement should also contain a dispute resolution clause. This is your saving grace, as it avoids deadlocks that can harm the company and spell out the procedure for resolving disputes that might otherwise bring your business to a grinding halt.  A dispute resolution clause will also spell out whether mediation is required before anyone can go to court, and whether legal actions between the parties need to be submitted to arbitration in lieu of taking a case to court.  A mediator does not decide who wins and who loses.  He or she merely acts as a neutral party in attempting to bring the parties together on a compromise that does not include taking legal action.

Nowadays, courts encourage parties to try to resolve disputes without involving going to court. There are statutes, for example, that require the losing party in a contract case to pay the winning party’s attorney’s fees.  This acts as a disincentive for a party to file a lawsuit for fear that they may be held liable for the other party’s attorneys fees should they lose.

Using an Attorney to Draft the Agreement

Whatever you do, never take a partnership agreement or operating agreement off the internet and try to adapt it to your business.  Generic documents, such as those you may find even on legal document websites, are not tailored to your particular business’s needs.  Different states have different laws that apply to partnerships and LLCs.  Documents that you pull from the internet are not likely to be state-specific, and even if they are, they will not comprehensively address all of the issues that are germane to your particular business.  The only way to ensure that the governing document for your business meets your business’s needs is to sit down with an attorney, cover all of the issues that are of importance to you and your partners, and then have the attorney draft up a document that is tailored to exactly what you need.

Partnership and LLC disputes can be complex and challenging. If you are facing a partnership or LLC dispute, call (480) 536-9991 or fill out our contact form and talk to an Arizona business attorney, so you can begin discussing your needs.

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