Operating a business is always a challenge, with everything from profits and losses to ethics and client retention to keep in mind. However, one of the many aspects of operating a business which has expanded to a sufficient size, is creating a partnership agreement that details how the heads of the business will engage with each other, and define their individual responsibilities. There is potential for one partner to withhold or exclude another partner from operation and business information. This can cause issues and be a point of conflict.
Even the most effective teams will encounter disagreements on occasion, and in a partnership, these partnership disputes can have bigger consequences. The following are the most common reasons why business partners find themselves in conflict. If you are experiencing these or other conflicts, or if you would like to create a robust agreement that averts these issues before they arise, be sure to work with an attorney who focuses on this area of conflict.
What Is A Business Partnership?
A business partnership is a company structure composed of two or more people who agree in advance to cooperate for the benefit of the company. While these individuals may receive advantages for themselves as a result of holding specific positions, it is expected that their work will have a duty first and foremost to the business rather than to themselves. This arrangement is typically governed by a partnership agreement, which is where many of the most common disputes originate.
Breach Of The Signed Agreement
When a partnership is formed following an agreement by at least two people, the most common next step is to draft and sign a partnership agreement that outlines the expectations, responsibilities and processes that are anticipated by each of the participants. Even if this agreement is created together as a joint effort by all partners, issues can still arise with the document itself due to misunderstandings, ineffective wording, the addition of other partners later and more. Violations of the details stipulated in the agreement can lead to a variety of conflicts ranging in severity from arguments to legal disputes.
Most companies require that their partners not disclose information about the business, to avoid harm to the long-term success of the business. This could include trade secrets, investment or acquisition plans or other knowledge that should not be shared by partners. However, if a partnership agreement is not explicitly clear on what information is, or is not, confidential, a partner may come into conflict with the other members upon accidentally or intentionally sharing information. Similarly, determining the consequences of a confidentiality breach could lead to disagreement if such matters are not already delineated in the agreement itself.
Most business partners are bound by fiduciary duty, or the duty to do what is best for the company and the partnership; failure to do so can create a conflict. Fiduciary duty is not limited only to the financial sector, though this is the most common place for the term to appear, most typically in the context of an investment manager’s fiduciary duty to his or her clients.
However, if a business partner makes decisions, such as profit allocation or compensation rates, based on their own personal desires and goals rather than with a view of what benefits the business, they may not be acting as a fiduciary. A robust partnership agreement will outline what fiduciary duty includes for that particular organization, and what to do if a partner does not appear to be upholding that duty.
If a partner is failing to maintain his or her responsibilities or acts in a manner that causes conflict, problems can arise. This category can be broad and encompass a wide variety of possible behaviors, which means that it is vital that a partnership agreement clearly and comprehensively outlines what appropriate partner conduct shall be. Partnership disputes most commonly occur when a partner is no longer upholding their responsibilities, such as by failing to work to meet their expected goals, or offloading the processes onto other employees. Partner conflicts may also arise when partners take undue advantage of paid time off, leave early or arrive late.
Some partnership agreements require that the partners maintain a clean criminal record which may cause issues at various points during work for the company. An individual may feel unjustly prohibited from becoming a partner due to a conviction, or it may be necessary to determine what steps are necessary if an existing partner is criminally convicted during his or her tenure. How these situations are handled will be based upon the values and needs of existing partners, as well as the industry of the business, and perhaps the type of criminal conviction. For example, some financial businesses will immediately terminate partners who are convicted of finance-related crimes such as embezzlement.
Allocation Of Benefits
In addition to the general details outlining what is expected of each partner, a partnership agreement will also include instruction regarding the management of the business finances and the guiding principles that will assist with decision-making. It is important that these values be outlined within the partnership agreement itself to avoid conflict later when allocating money or other financial resources.
Reinvestment, Distribution And Compensation
A partnership agreement may clarify how much each partner will be compensated, how much profit is reinvested and how much is distributed, or a variety of other financial concerns. On average, the financial portion of the business tends to be the area that generates the greatest number of disputes. Ideally, a robust partnership agreement will outline the ideal metrics and strategies for investment and compensation well in advance, giving partners clear expectations ahead of time.
Specifications Within The Partnership Agreement
Conflict may stem from partners who receive benefits as part of their agreement, but feel they are not being appropriately compensated. This issue could be the result of a misunderstanding of the agreement itself, poor wording or a belief that the stipulations outlined in the agreement are not fair. This is why a partnership agreement should also contain an established process for airing grievances, allowing them to be addressed early, before they escalate into major conflicts.
Achievement Of Goals and Ethics
As a business partner, each individual will be expected to contribute to the business in a manner that non-partner employees do not. When a partner either does not fulfill these goals or wishes to remove themselves from those responsibilities, a partnership agreement should outline the appropriate process.
If a partner is not satisfied with the direction of the company or its goals, they may create a disruption in that progress. Partnership agreements often include outlines of future plans and mission statements that help guide all future decision-making. This requires clarifying the information within the agreement itself to keep partners on the same page regarding the direction of the company.
Wish To Terminate
A partner choosing to leave the business may result in conflict for many reasons. The best partnership agreements outline this process, including a step allowing for a discussion of grievances and a detailed plan for concluding partner responsibilities and compensation in a fair and manageable method.
A solid partnership agreement does not leave any room for unresolved legal matters among partners. Any agreement for a partnership should include clear and comprehensive language regarding the anticipated consequences of any potential legal issues. Engaging in a legal battle, in addition to a partnership conflict, while operating a business, can place undue stress on your company and divert valuable skills, resources and time from critical processes.
What fraud means to your company will depend on your unique business and industry. In any business, if a partner is found to be committing fraud, your partnership agreement should include a detailed process for removing that person from the partnership role, seeking legal action if the company has been damaged or is exposed to damages as a result or other possible detriment to the company or its remaining partners. This removes the emotional reaction from the situation and ensures all partners understand what is expected of them.
Since most partners have access to the company’s finances, or at least intimate knowledge of such matters, embezzlement is more common among partners than other employees. This type of situation should always be outlined in a partnership agreement; it should define how the business intends to receive compensation for financial damages and what processes the offending partner will follow to compensate the business. Some partnership agreements even outline processes intended to prevent embezzlement allowing partners to feel empowered rather than surveilled.
Trust The Professionals To Help You Navigate Partnership Disputes
Whether you are drafting a partnership agreement to prevent future partnership disputes, or you are encountering conflict within your business, consider the advantage an experienced attorney can provide. Seeking the guidance of an expert can equip you with the ability to avert the most common conflicts among partners and navigate the process of de-escalating conflicts already existing. The professionals at KPPB LAW will gladly help you navigate partnership disputes and work with you to create a solid partnership agreement.