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Avoiding and Resolving Partnership, Shareholder & LLC Members Disputes


For many reasons, good and not so good, well thought out and impulsive, people often choose to be in business with others, as partners, shareholders in a corporation or members of an LLC. To keep it simple, I will refer to all of these co-owner relationships as partners. Like marriage, partnership requires the right partner, hard work and it is not always successful. Successful does not refer to the business which is the object of the partnership, but rather the partnership relationships itself. Many successful businesses experience a failed partnership, and in at least some instances, the success of the business may be the reason for the failure of the partnership.



Common partnership issues:




โ— A partner is perceived as being dishonest toward the partnership.


โ— Partners do not share a common view toward a material aspect of the business.


โ— Business partners who have a personal relationship that breaks down allow the personal problems to impact their business relationships.


โ— The business itself does not produce enough income to meet the needs of more than one owner.


โ— One or more of the partners lack the ability or desire to make common decisions.


โ— Unequal ownership causes the minority owner to believe that they are not being fairly treated.


โ— One owner perceives that they are making a larger contribution to income than their share of profit.


โ— One partner buys into a business formerly exclusively owned by the other partner and the original owner is unable to relinquish total control.


โ— The stakeholders in the business include people other than the partners, such as spouses, so that non-owner voices are attempting to influence the conduct of the business.


โ— Changes of personal circumstances, marriage and divorce, children, illness and disability change the way one or more owner participate.


โ— In a family owned business, issues of family dysfunction find their way into the business.


โ— One partner believes that the other partners who hold a majority vote are not treating him fairly or the majority partners believe one partner should be forced out.


โ— While it may not be possible for majority partners to force a partner out of ownership, it may be possible to remove that partner as an employee of the business and deprive that partner of the business income that is earned from employment.


I could go on but this is at least a representative list and likely depressing enough!




Common ways to avoid partnership problems:


โ— Now hear this! The single most effective strategy for avoiding partnership disputes is to avoid having a partner. OK, that is about the equivalent of saying that the most effective way to avoid divorce is not to get married. While there is a simple fundamental truth to both concepts, it remains a fact that marriage and business partnership will happen, and often for good reasons.




โ— Thus, it is more important to have a partner for the right reasons and to pick the right partners. The right reasons and right partners generally do not include friendship. By friendship, I mean it is not wise to pick a partner that does not meet an essential need of your business plan because that person is your friend and it feels comfortable. Most small businesses generally do not produce enough income to well compensate more than one owner for the management of the business, so you risk dividing income with a friend rather than expanding the synergy of the business. It is best to seek partnership with others who bring essential elements you don’t have or can’t easily obtain from others without being their partner. For example, you don’t need a partner who knows how to do payroll when there are numerous vendors who offer such services.



โ— It is also important not to pick a partner out of desperation. It may well be that a particular person has the money you need to start your business. But after that money is spent, youโ€™re in a long term business relationship with that personโ€™s talent and personality, and if that personality and talent do not mesh with your personality and skill set you will soon be regretting your choice.



โ— While for me a detailed written agreement with your partner generally falls into the category of a tool for resolving a dispute rather than avoiding one, the process of crafting the written agreement is a communication process which flushes out differences in advance and allows you to address them or decide whether that person is the wrong partner. Blindly signing a form agreement you find on the internet wonโ€™t achieve the goal of a detailed communication. There are many issues that might be discussed. Here are just a few examples: (1) Will partners be allowed to be involved in other business enterprises that will make them less available to the partnership; (2) Will there be compensation other than profit based upon responsibility undertaken or the amount of hours worked; (3) Who will attend to the bookkeeping of the business and, if that is after hours, will those tasks be separately compensated; (4) What kind of time off is contemplated; (5) What role, if any, will spouses and other family members have in the business; (6) What individual expenses will the business reimburse (gas, cell phone?). Donโ€™t assume that there is one right way to address all of these issues. And, while it might be reassuring to instantly agree on all of these issues, it is more valuable to disagree on at least a few of them and discover how effectively differences of opinion are addressed. You might learn in the process that your prospective partner will always insist on having things their way!




โ— Having a written agreement with partners, even family members is essential. Written agreement do not make for good relationships or successful businesses. They primarily exist to make clear rights and obligations which are now the subject to dispute and to provide a means for addressing those disputes.






The Law Offices of Peter Stanwyck will assist you with:


โ— Entity Formation. Negotiating and drafting partnership, shareholder and membership agreements.
LINK: Negotiating and Drafting Partnership, Shareholder and LLC Membership Agreements
โ— Resolving differences and deputes between owners with small business mediation. LINK: Resolve Differences through Small Business Mediation
โ— When no other option is available, solutions that involve arbitration and litigation.
LINK: Arbitration and Litigation.
โ— And, when you donโ€™t yet think of differences as an urgent problem but rather circumstance that needs to be talked about: LINK: Small Business Coaching



Disclaimer:ย The material ย in this blog does not constitute legal advice, does necessarily reflect the opinions of the Law Offices of Peter M. Stanwyck or the author of the material if not Peter Stanwyck and is not guaranteed to be correct, complete, or up-to-date. Consult with a qualified attorney to address the specifics of your circumstances.


Posted 06 / 03 / 2012


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