Corporations, LLCs and other formal business organizations have many advantages, but they also come with technical and time-consuming requirements. A partnership has no such requirements. It’s much easier to form.
As long as you and your partners see eye-to-eye on every issue, a partnership is pretty much the perfect way to run a business. But, let’s face it, no two people see eye-to-eye on every issue forever. Eventually, you and your partners will have disputes, and some of these disputes will be serious.
It’s wise to have a partnership agreement that spells out how you will resolve these disputes.
Here are some of the most common ways to resolve a partnership dispute:
Mediation
A mediator is a trained professional who facilitates discussion between opposing sides. Unlike a judge or an arbitrator, a mediator does not render a decision. Rather, the mediator stays neutral but helps the opposing sides to reach an agreement.
Mediation requires a lot of negotiation, and it is not guaranteed to work, but it is almost always quicker and less expensive than the other options.
Litigation
Filing a lawsuit against one or more partners may be necessary, especially in cases involving allegations of misconduct. Such cases may involve awards for damages.
Buying out one or more partner
If the partners simply cannot agree, one or more partners can buy out the other partners’ shares in the company. This can be a good option in many cases, but it may be prohibitively expensive in others.
To initiate a buy-out, the partners must first get a valuation of the company in order to decide upon the price.
In some cases, none of the partners wants to leave, and so will not agree to a buy-out. Sometimes, the partners can get around this type of problem by initiating a freeze-out merger, in which the majority owners create a new company and then merge the old company into the new one, leaving the opposing partners out.
Bankruptcy or dissolution
Many partner disputes arise out of a company’s serious financial problems, and some can only be resolved by shutting down the company. This may be achieved voluntarily by all the partners or through Chapter 7 bankruptcy.
Partnership agreements
It can be difficult to know which option to pursue when you are in the midst of a partnership dispute. As noted above, you can avoid that part of the problem by noting in a partnership agreement how you will resolve disputes in the future. Still, even with the best agreement in place, disputes can sometimes be more difficult to resolve than anyone anticipated. It’s wise to seek out help from experienced professionals.