If you own a business, you likely spent many hours planning and preparing before opening your doors. The planning and preparation phase can be both exciting and stressful, but while you were planning for your new business, did you add terms in your partnership agreement, operating agreement, corporate bylaws or shareholder agreement for how you and your partners and fellow owners would handle disputes? It’s likely you never considered what you would do if you and your business partners or members could no longer make the business work. Business partnerships are legal relationships requiring more than a simple verbal agreement to solve serious legal issues. So, what happens if you and a business partner reach an impasse when managing your company? What legal recourse do you have?
How a Dispute Becomes a Partnership Lawsuit
Ending a business partnership is not a one size fits all process. How you proceed with your business dispute will depend on the terms of your partnership agreement, operating agreement, shareholder agreement or corporate bylaws. Business partnership disputes are more common than you may realize. Common reasons for business partnership disputes include but aren’t limited to:
- Negligence by a Business Partner
- Abandonment of the Business Partnership
- Misappropriation of Assets or Money, Embezzlement
- Weak or Poorly Drafted Operating Agreement, Bylaws, or Shareholder Agreements
- Breach of a Operating Agreement, Bylaws, or Shareholder Agreements
- Breach of Fiduciary Duty
- Failure to Delineate Authority
Common Reasons for Membership Disputes
We explore the list above in greater detail to help you avoid these issues if you have a partnership or LLC now or are currently planning to enter into an LLC Operating Agreement or partnership agreement in the future.
Breach of Partnership/Operating Agreement: When two or more parties agree to create a formal partnership, they create a partnership agreement or LLC Operating Agreement that governs the arrangement and provides enforceable terms for operating the business. If you can prove your business suffered losses due to your partner’s breach of the partnership/operating agreement, you may have a strong claim should you file a lawsuit.
Breach of Fiduciary Duty: When entering a partnership or LLC, each party agrees to act in the business’s best interest. When one party places their individual needs over those of the partnership or Limited Liability Company, they could be in breach of their fiduciary duty to their business partner and the partnership or Limited Liability Company. A member of the partnership/LLC can be liable for acting against the interest of the partnership or Limited Liability Company in several ways, but the most common are:
- Misappropriation of Funds
- Theft of Company Product for Personal Gain
- Inappropriate Actions Leading to Business Losses
- Gross Waste of Company Resources
Any partner or member in your partnership has a fiduciary duty of good faith, care, and loyalty to the business you’ve created. Failure to meet the obligation of one’s fiduciary duty to a partnership and Limited Liability Company is a serious dispute that could lead to a lawsuit or the dissolution of the business.
Failure to Delineate Authority: Parties entering into a partnership or limited liability agreement need to define the roles and responsibilities of each partner clearly. When roles and responsibilities are not clearly defined, disputes are inevitable. A weak foundational agreement can lead to confusion and inefficiencies within the business.
Gross Negligence: Negligence is a broad term, and while you may ask if you can sue your business partner for negligence, the answer may not be as straightforward as you’d like. You can sue your business partner for negligence, but you must prove you have a valid claim. You will need to provide proof your partner acted unreasonably, without care and that your business suffered because of their unreasonable and careless actions. If you have proof along those lines, then you may have a strong negligence claim. You and your partner and fellow owners all have a duty of care to your company, so you are expected to make decisions on behalf of the business in good faith and with proper care.
Partnership Abandonment: What happens when a member of the partnership decides to leave? A business partnership may have been created with the best intentions, but that doesn’t mean they will last the test of time. Members of a partnership or Limited Liability Company are allowed to end an arrangement or part in a partnership and go their separate way. However, much like in a marriage, walking away requires paperwork. If a partner leaves the agreement before the proper dissolution of the agreement, it could lead to legal action. Whether or not you can, or your partner can, sue for abandonment depends greatly on the details of the partnership agreement or Operating Agreement. Partnership or Member lawsuits could be filed on the grounds of abandonment if a partner in the agreement deserted their business partners in a manner that violated the partnership/LLC agreement or international abandonment that intentionally or inadvertently harmed the business and benefited the abandoning partner. An experienced business dispute attorney can review your agreement and determine if a lawsuit is possible in your situation.
Seattle Business Partnership Dispute Attorneys
Do you need help reviewing the details of a business partnership dispute? Contact Tomlinson Bomsztyk Russ; we’ll help you determine the next steps in your partnership or LLC dispute. We want to help you make the best decision for you and your business. Call (206) 203-8009 to schedule a consultation.