One of the most common matters we deal with after advising clients on setting up a partnership is not the legalities of operating the partnership business but all too soon about how to resolve disputes that arise.
What is a partnership?
A partnership simply described is a business structure in which two or more individuals or entities decide to run a business together.
There are basically three types of partnerships:
- General Partnership
- Limited Partnership
- Incorporated Limited Partnership
In a General Partnership each party has an equal say whilst running the business and are equally liable for anything that goes wrong.
A Limited Partnership as there are both general partners who manage the business and have unlimited liability, and then there are limited partners who invest money.
Finally, Incorporated Limited Partnerships are for high risk ventures where all partners, except one, have limited liability, protecting most partners from losing more than they’ve invested.
Each state in Australia has its own Partnership legislation which govern how they operate especially where there is no written partnership agreement.
Partnership can be an effective business structure as they are cost-effective to set up, have less red tape to deal with and can be private when it comes to disclosing financial information.
However, the negative side of a partnership is that they have unlimited liability generally, can have limited growth potential as partnership typically have a cap of 20 partners and they are often prone to disputes.
It is important to have a partnership agreement and in particular a good partnership agreement will:
- Outline the rights of each partner
- Detail how profits and losses are dealt with in relation to each partner
- Describe how each partner can exit from the business
- Consider what limitations are placed on a partner when they leave the business
- Have a dispute resolution provisions between the partners
How to resolve disputes is what this article considers.
Disputes in a partnership can be stressful and divert energy and resources for lengthy periods and can be costly.
The main causes of partnership disputes are financial disagreements and in particular relating to capital contribution and profit distribution.
Other issues often giving rise to a dispute are the direction of the business and disagreement regarding the business planning priorities, uncertainty around the roles of the partners, breaches of fiduciary duties or a total breakdown in communication.
Communication is key in any relationship and even more so in a partnership. If there is an issue that you as a partner feel is not being addressed confront it and look to discuss it openly, honestly, and respectfully with your other partner/s. Experience has shown often that when communication is an issue in a partnership it is often due to a misunderstanding. Don’t let an issue fester – discuss it.
If need be, engage an independent person or even your trusted advisors such as you accountant or lawyer to discuss in an objective manner what the issue is and a pathway forward to resolving the issue. Sometimes it is even worthwhile seeking the assistance of an independent mediator or arbitrator to resolve the dispute.
Hopefully a well drafted partnership agreement will have an agreed pathway to resolve any dispute, so it is important to review and understand your partnership agreement.
If you have exhausted all forms of alternative dispute resolution, you might have no choice but to revert to the courts or to a tribunal to seek a resolution to the matter.
Courts have the powers:
- To make orders as to how the partnership will be operated
- To order one partner to buy out the other partner/s
- Terminate the partnership
The courts should always be the last resort.
Experience has shown me that some of the most expensive and aggressive disputes have resulted from a minor issue that if discussed and addressed at an early stage could have been resolved with minimum fuss and disruption.
How can FC Lawyers help?
Our experienced team of business and corporate lawyers has handled hundreds for partnership disputes.
Contact our team today for an obligation free discussion and see how we can help you.
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