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How to minimize the risk of partnership disputes

What started out as a positive venture can quickly turn sour when partners fall out. Issues of ownership, control and the survival of the business can easily be threatened when partners disagree.

Unfortunately, disagreements among business partners are relatively common, and they can be very serious. We can all imagine differences in opinion or business judgment being irritating or problematic, but many partnership disagreements stem from a lack of trust, or worse. How can we prevent these costly, destructive disputes?

Should it be an equal partnership?

One way to reduce the chance for a serious partner disagreement is to intentionally structure the partnership so that one person has more decision-making authority. This can be done by having each partner buy into the partnership at a different rate. Or, a controlling partner can be specified in the partnership agreement.

Having one partner in control may not prevent all disputes, however, so you will need to include a mechanism for resolving disputes in your partnership agreement. For example, if a lesser partner can’t live with a decision the controlling partner has made, the agreement could say that the lesser partner has the right to pull out of the partnership. You should set a formula in your agreement for buyouts. You should also include a mechanism for when a lesser partner simply refuses to follow the controlling partner’s lead.

Inequality between partners can actually be the key to a satisfactory relationship. However, some people will insist on having an equal partnership. If you do, be sure to set up the dispute resolution mechanism in your partnership agreement.

This could be a way for an unhappy partner to exit the partnership, an agreement to abide by mediation or arbitration, or some other third-party mechanism for resolving disagreements. The downside of having a dispute should still be significant.

When you develop any legal agreement, it’s important to structure it so that it speaks to risks both known and unknown.

For example, suppose you structured your partnership so that one partner is controlling. What roles should the other partners play? What happens if one lesser partner contributes far less to the partnership over time than the others do? That could mean the less active partner receives benefits from the partnership without taking many risks. This could lead to heated disputes and feelings of betrayal.

Ideally, you would have gone through these “what ifs,” to the degree you can, as you negotiated the contract. Expectations, especially financial expectations, should be clear. There should be a concrete dispute resolution mechanism. There should be an exit available for unhappy partners, but there should be incentives to remain within the agreement. An experienced business lawyer can help.