Main Causes of Partnership Disputes – Business Divorce

Partnerships are often complex relationships; which require a good deal of upfront planning and preparation for disputes that may arise down the road. Unfortunately, even after taking all of those steps, many successful partnerships simply fall apart; the Beatles are perhaps the most notorious example of that. 

These disputes have become so commonplace with partnerships, particularly family-owned businesses, that they are commonly referred to as business divorces. After all, your business partner is typically someone you trust implicitly and someone you have worked with through thick and thin; however, just like other relationships, disagreements can occur. In many instances, there is genuine disagreement between partners wherein both sides honestly believe they are in the right. Perhaps it may be a lack of paperwork documenting an element of the deal or the terms of the agreement are unclear or ambiguous. In any event, once there is a perceived violation of that trust, the problems tend to follow. 

Business partners may also experience conflict about the direction of the business, sharing the workload, or money. Open communication and clear documentation of each partner’s obligations, responsibilities, and financial contributions can help resolve disagreements. Understanding the common causes of partnership disputes can help you and your partners avoid conflict or resolve your issues amicably.

Fiscal Disputes

It should be no surprise that the most common reason for partnership conflict is money. Differences of opinion on how funds should be allocated and the company’s day-to-day management can quickly turn into significant disputes.

If one partner starts mixing personal funds with business funds, the business relationship can quickly sour. The strain can get worse if the business goes through financial difficulties. Unless the partnership agreement clearly states each partner’s profit distribution and liability, these arguments can easily become legal disputes.

Make the ownership rules clear from the start, and put them in writing. Include prohibitions from commingling business and personal funds and have a trusted business attorney look over the agreement. 

Ownership rules also state how much time, effort, and money each partner will put into the business and whether they will draw a salary for their work. The partnership agreement should also cover details of profit distribution and spell out money disbursement and expenditures.

Intellectual Property Disputes

Establishing whether an individual owns the intellectual property that the company is using or if the intellectual property belongs to the company is another reason for business partnership disagreements. Intellectual property can take many forms, from the logo to the concept, training materials, or even the kinds of goods sold in a storefront.

Suppose an individual owns the company’s intellectual property but hasn’t legally documented ownership or user permissions. In that case, that individual could risk losing their intellectual property (IP) rights. Courts may rule in favor of the company, stating that the property belongs to the business.

If you plan to use your intellectual property in your business, make sure that you document ownership and use rights from the start. If a dispute over the IP arises, the property owner can legally revoke the company’s permission to use it. Establishing the conditions in which intellectual property may be used can prevent issues down the road.

Questions of Authority

Who is the boss? Are the partners all equal, or does the final decision-making authority rest with one person? Many businesses have partners responsible for specific purviews, such as overseeing company operations, monitoring financial matters, or marketing and expansion.

Without a clear separation of duties, partners can end up overstepping each other’s boundaries or providing conflicting directions to the staff. Each partner likely has a different perspective on how the business should be run and may make decisions that impact other business areas. For example, a marketing partner may overspend on an ad campaign, making it harder for the operations partner to procure supplies.

Disputes over the Overall Business Objective

What are the long-term goals of the company? If you go into business without a clear plan, expansion can flounder. Do all of the partners want to expand, or would one prefer to stay smaller and family-owned? What if one partner wants to start franchising – is that what all partners wish to do?

Having a conversation about the company’s goals and how far to expand can ensure that all parties are on the same page for growth and development. Placing the long-term plan in writing allows business partners to revisit it as the business grows and evaluate the potential for expansion.

Like any other close relationship, business partners should have an open conversation about goals, responsibilities, and financial obligations. Establishing contracts and written agreements can help resolve disputes or prevent them from occurring in the first place.

When your partnership or family-owned business entity is experiencing difficulties or you need advice on how to proceed please contact our team of experienced and skilled business attorneys at Woods Lonergan, for an initial no-charge consultation on your options and how best to protect your interests and your company.