Navigating Disputes: Hire a Partnership Dispute Lawyer

A falling out between partners can be disastrous for any business. In many cases, the partnership will not survive. If you are in an unworkable situation with your partners, it may be time to consult a partnership dispute lawyer experienced in handling partnership breakups and dissolutions before the situation deteriorates any further.

It is easy to form a partnership. Many people become partners without realizing it, because whether a partnership exists is a question of law, not intent. It is also easy to end a partnership by simply walking away. What is not easy is doing it well. Partners often stumble during a breakup, incurring liabilities and costs that could have been avoided, and the consequences of a poorly executed partnership breakup can be very significant.

Keys to Resolving a Partnership Dispute

The first, and likely most significant, piece of advice: stay calm. It is not uncommon for partners to disagree. Engaging in a healthy debate before making any major decision can strengthen your business. What sets a successful business apart from a failing one is how it handles disputes. Below are a few tips:

• Keep discussions respectful. There is not always one solution to a dispute. It is important to articulate your position on the disagreement clearly and to listen to your partners’ concerns and suggestions.
• Focus on facts over emotion. Partnership disputes are stressful. To avoid letting emotions cloud your judgment, try to step back and be as objective as possible about the situation.
• Seek common ground as a starting point. You do not have to resolve every problem at once. Start with the issues where you are most likely to reach a compromise, then tackle the more challenging ones.
• Establish a plan and follow it. Once you have agreed on a plan to resolve the dispute, it is time to move on. To avoid future disagreements, all partners should use their best efforts to execute the plan as agreed.
• Write it down. Partnerships rarely operate with much formality. Experience, however, tells us that the details of a working agreement are easily forgotten or misunderstood. A formal action, such as a partner vote on a written resolution, is recommended but rare. At a minimum, prepare and circulate a written memo or email to memorialize the agreement.

If you and your partners are unable to resolve your dispute on your own, mediation may be an option. In mediation, a neutral third party helps the parties negotiate their differences to settle all or some of the issues in dispute. The mediator’s role is to help the parties find common ground, not to make a binding decision.

Unlike litigation, mediation is an informal and confidential proceeding in which the parties retain significant control over both the process and the outcome. In many partnership disputes, working with a mediator can be extremely helpful in finding middle ground and devising creative solutions that allow the parties to move forward. It could even save your partnership.

What Happens If a Partnership Dispute Cannot Be Resolved?

In some cases, a deadlock can spell the end of the partnership. If you have exhausted every avenue for resolving the dispute, it may be time to consider an exit. If you want to continue with the business, you can buy out your partners’ interests. If you are ready to move on, your options are to sell your interest to the other partners or to dissolve the partnership altogether.

The first step is to consult your partnership agreement. A well-drafted partnership agreement will address how partners exit the business. Many partnerships, however, have never executed a formal partnership agreement, in which case the partners must rely on the provisions of the state’s partnership statute.

Partnership Buyout

A well-drafted partnership agreement will include buy-sell provisions that guide the process, including how to value the business. If you do not have a buy-sell agreement already in place, you and your partners will need to negotiate one.

Partnership Dissolution

If you and your partners decide to close the business, the first step is to negotiate a partnership dissolution agreement. A partnership dissolution agreement is a legal contract between two or more partners that sets out the terms for ending their business partnership. Executing a partnership dissolution agreement does not immediately terminate the business. Rather, it outlines the process for winding down the business and establishes the rights and obligations of each partner going forward.

Important issues to address include whether the business will continue, the allocation of profits and losses, the partners’ rights and responsibilities going forward, and the payment, closing, or assignment of accounts. The partnership will have to wind up its affairs, and resolving its unfinished business is a major concern.

If your partnership agreement does not address dissolution and you cannot reach agreement, state law will control. For instance, the New Jersey Uniform Partnership Act may deem the partnership dissolved upon a partner’s withdrawal. It may require the remaining partners to pay the withdrawing partner the fair value of that partner’s interest.

Partnership dissolutions may also end up in litigation. The partnership statute authorizes any partner, even without a partnership agreement, to apply to the court for dissolution of the partnership. In that event, the court may take control of the dissolution and supervise the winding-up process.

Frequently Asked Questions About Partnership Disputes

Do I need a written partnership agreement to dissolve a partnership?

No. A partnership can be dissolved without a written agreement, but in that case the New Jersey partnership statute governs the process, including how a withdrawing partner is paid. A written agreement gives the partners control over those terms instead of leaving them to state law.

What is a partnership dissolution agreement?

A partnership dissolution agreement is a contract among the partners that sets out how the business will be wound down, how profits, losses, and accounts will be handled, and what each partner’s rights and obligations are going forward. It does not end the business on its own; it establishes the roadmap for doing so.

Can a court force the dissolution of a partnership?

Yes. Under New Jersey law, any partner may apply to the court to dissolve the partnership, even if there is no partnership agreement. The court can then take control of the dissolution and supervise the winding-up process.

When should I hire a partnership dispute lawyer?

Ideally, before the dispute reaches a breaking point. Counsel can help you evaluate your options under the partnership agreement and state law, structure a buyout or dissolution, and avoid liabilities that often arise when partners act without advice.

Work With an Experienced Partnership Dispute Lawyer

Partnership law can be complicated, and the decisions made during a dispute can affect both the business and the reputations of the people who built it. Before taking any drastic step, it is worth consulting an experienced partnership dispute lawyer. Scarinci Hollenbeck’s partnership attorneys can help you consider all of your options and make an informed decision about your partnership and its future.

If you and your partners are at an impasse, contact Jay R. McDaniel, a Partner in Scarinci Hollenbeck’s Litigation practice who focuses on partnership disputes, business divorce, and business valuation across the firm’s offices.