How to Avoid and Resolve Partnership Disputes

February 9, 2021

Partnerships Dispute 1-min

A partnership is created when two or more individuals agree to operate a business as co-owners. A partner does not have to be an individual. It can be an entity such as an organization or a trust. Any partner can have any share of the partnership, however, the total shares must equal 100%.

There are three types of partnerships, a general partnership, a limited partnership, and a limited liability partnership. Each of them differs from each other in the management rights and personal liability for business debts of each partner.

While states typically have their own rules regarding partnerships, these rules are defaulted to and used in the absence of a partnership agreement or a specific provision in the agreement. When it comes to each partner’s rights and responsibilities within the partnership, the partnership agreement will govern. Additionally, it will govern business decisions and a partner’s authority to make them. Absent a partnership agreement, default rules, such as the Virginia Revised Uniform Partnership Act and D.C.’s Uniform Partnership Act of 2010, will govern those decisions, rights, and responsibilities.

Types of Partnerships

General Partnership

A general partnership is a business relationship in which two or more people share in the management and responsibilities of the business. Partnerships are perhaps the simplest business entity to form. To form a partnership, two people or more people must agree to conduct business for profit, either orally or in writing. In a general partnership, each partner can be held personally responsible for the debts of the business. Importantly, general partnerships can be formed without explicitly agreeing to operate as partners, so it’s important to be careful when working with others for a common business goal.

Limited Partnership

A limited partnership is made up of two types of partners. There must be at least one general partner who can be held liable for business debts. The other partner, the limited partner, holds a limited liability. The limited partner’s liability is limited to the amount of the investment he made towards the business.
The general partner’s greater liability is a result of his responsibility for business obligations. This also means that the general partner generally has more control over day-to-day business operations and business decisions.

The limited partner, sometimes referred to as the silent partner, is not directly involved in management decisions. Generally, the limited partner merely makes investments that support the business and its purpose.

While some states require partnership agreements to form limited partnerships, Virginia and Washington D.C. do not require such. However, it is highly advised that one is created and filed to help resolve a dispute should one arise.

Lastly, there must be public disclosure that the business is operated as a limited partnership by stating so in the company name using “Limited Partnership” or “LP.”

Limited Liability Partnership

In a limited liability partnership, all partners have limited liability as to business debts. The business is often required to carry insurance to cover potential personal liability for business debts. Limited Liability Partnerships are most often seen where a business offers professional services such as accounting firms, law firms, and doctor’s offices.
Like the limited partnership, the name of the company must indicate that the business is a limited liability partnership by containing “Limited Liability Partnership” or “LLP.”

Partnership Disputes

Partnership disputes are almost inevitable as two or more people are not always going to agree on everything. The most common causes of disputes between partners include:

  • Breach of fiduciary duty: A fiduciary duty arises where a high level of trust is necessary based on the relationship. The fiduciary has the duty to act in the best interest of another person or entity. Breach of a fiduciary duty is often seen where one partner misappropriates funds or otherwise harms the business.
  • Financial Disputes: These might manifest when a partnership is suffering some kind of financial stress and partners disagree as to how debts and liabilities to be paid. It is also seen where partners don’t agree on where resources should be allocated.
  • Workloads: Partners might disagree on who is doing what work and how much work each is doing. When one partner feels that the work is not distributed evenly, conflict can arise. Absent a partnership agreement, it is often is difficult to delegate work and responsibilities.
  • Lack of Clear Provisions in the Partnership Agreement: Provisions as to the rights, responsibilities, and authority of each partner should be clearly stated in the partnership agreement.

Disputes can arise when partners believe the business should operate in different ways and there are no provisions to guide business decisions and who makes them.

Avoiding Partnership Disputes

The very first thing two or more partners should do when creating a partnership is clearly define and understand each partner’s rights and responsibilities to the business. Partners should discuss major business decisions before forming the business and who will make future management decisions. Additionally, the partners should agree upon the business objectives before starting to do business.Once this is agreed upon and understood, it should be reduced to writing in a partnership agreement. If partners are unsure of what to include in the agreement, a business law attorney can help prepare one. It would be wise to add an alternate dispute resolution provision to the agreement. This helps the partners to understand how disputes will be resolved should they arise and what can be expected at that point.

Should a dispute arise, partners should first look to the partnership agreement to determine if there is a way in which it must be resolved. Additionally, a business law attorney can help the partners to understand any documents that delegate authority over the issue at hand. Of course, if a dispute cannot be resolved, partners may be left only with the option to litigate or dissolve the partnership.

If You Have Questions About Your Partnership, Call the Virginia Business Lawyers of McClanahan Powers, PLLC

If you have questions about your partnership or need assistance during a dispute, the experienced employment law attorneys at McClanahan Powers, PLLC, can help. Our experienced business law attorneys can identify important partnership documents necessary to resolve a dispute. Call McClanahan Powers, PLLC at 703-520-1326, or visit our website to schedule your consultation today.