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Regardless of whether your business partner is viewed as a “member,”  “shareholder,” or “partner,” depending on the form of your business registration, no business principal wants to engage in litigation with a co-owner. Since shareholders have a financial stake in the company and their vote tends to govern the company’s direction, any form of a shareholder dispute can cause serious damage to your business if not handled properly! They can be costly in terms of time and efficiency, and, if left unaddressed, could have serious financial implications. Moreover, if a resolution is not reached, the company could be forced to dissolve.

If you don’t want this to happen to your business, continue reading to learn how to sidestep business partnership disputes and prevent them from harming your business in the short and long term!

Reasons For Business Partnership Disputes

Partnership disputes can stem from all kinds of problems. For instance, if the business partners disagree about the future of the company, they might clash over major investments in the company’s current operations, the establishment of new departments, expansion into new industries, location, and so on. A partner may also fail to disclose financial information to the other partner or believe that one partner is withholding financial information from them. It is possible that one of the partners may have benefited financially from a deal that the other did not. Any breach of the partnership agreement might lead the partners to file a lawsuit.

Regardless of the cause, reacting after the fact will take time and money. It would be more cost-effective and time-efficient to take proactive measures to ensure that disagreements between partners never occur in the first place!

Preventative Steps To Avoid Partnership Disputes

Here are a few things that almost every business can and should do ahead of time to lower the risk of business partnership disputes and keep their organization from harm down the road.

1 – Establish A Strong Attorney-Drafted Partnership Agreement  

Partnership agreements serve as the foundation for avoiding partner disputes in business. Most disputes occur because the initial partnership arrangement wasn’t clear to begin with! The key to averting future partnership issues is a well-crafted, litigated document that has been reviewed and approved by a lawyer. It should specify each partner’s roles, the decision-making process, and the procedures for dealing with disagreements, as well as each partner’s ownership and dividend preferences, their authority and voting rights, and the conditions under which they may leave the company.

Good partnership agreements reduce the likelihood of disputes escalating because they are written in a way that clearly communicates the expectations of each partner, and the procedures for how to resolve them.

2 – Allow For Regular, Open Communication 

Your partners need to be able to trust you, and they need to be able to trust each other; communication that is open, clear, and honest is the best way to encourage that. People who feel this way are less likely to respond with threatening letters from lawyers or to divert funds that are desperately needed to purchase inventory or pay bills. Prepare regular financial reports and send them to partners so that no one is ever in the dark about how the business is doing financially. Include your partners in discussions about the company’s long-term goals; hold regular meetings with them and ask for their questions and concerns. Have a regularly scheduled time to discuss any important issues that might affect the business, and make sure to follow up on any concerns that arise.

3 – Establish Clear Organizational Objectives 

Starting to see a pattern here? Clarity is really, really, really important! Ambiguity about partner expectations and responsibilities only increases the likelihood of deviating from organizational goals and eventually causing conflict. When this occurs, partners are more likely to reach for and take what is not theirs, to posture for position, to squabble over who and how orders are given, to second-guess, and to argue about who gets to call the shots. However, a lot of this can be avoided if you set clear guidelines for participation in day-to-day operations, high-level strategy, and decisions pertaining to the various areas of oversight by the board of directors, management team, key personnel, and other shareholders.

4 – Keep Up-To-Date Legal Records 

You should schedule periodic (say, annual or semi-annual) check-ins with your attorney to review your company’s critical documents, including the partnership agreement and bylaws. Moving forward, you want to make sure your documents continue to reflect the state of your business with current tax, employment, or regulatory laws in mind, and that they accurately document your partner and business relationships. Also, make sure that any new business is reflected accurately in your agreements and that they do not have any “tripwires” that could lead to future legal issues.

5 – Make Sure You Have Good Exit Plans In Place

Purchase and sale agreements can effectively prevent the potential for partner conflicts, which can be very damaging to a business. These agreements provide a way for an owner to buy out their partners and serve as an exit plan for unwanted partners. A well-constructed purchase and sale agreement will outline specific events that trigger the buyout, such as death, disagreements over business management, or retirement. This helps to reduce uncertainty about the timing and terms of the buyout. A strong purchase and sale agreement should also specify how the shares will be valued at the time of the buyout, ensuring that no one feels cheated. The agreement should additionally specify the means by which the buyout will be financed, be it through the buying partner, the corporation, or an alternative source.

Need More Specific Legal Advice? Trust Sierra Crest Business Law Group!

At Sierra Crest Business Law Group, our Nevada attorneys have a particular penchant for resolving and preventing partnership disputes. We have extensive knowledge of the circumstances that lead to partnership disputes and are well-equipped to advise business owners on how to avoid them. With over 60 years of combined business legal experience, each member of our team offers clear and reliable legal guidance to help clients achieve their personal business objectives.

Whether you require an independent review of your current documents or need assistance with setting up a new business, such as drafting a strong partnership agreement or buy-sell agreements, we are here to assist you. We make it our priority to understand the unique needs of your business and represent you accordingly. Contact Sierra Crest Business Law Group right away for legal advice on how to avoid unnecessary conflicts and keep your business running smoothly.