Forming a business partnership through a Limited Liability Company (LLC) or a corporation[1] can provide a solid foundation for success by combining diverse skills, resources, and efforts. However, these relationships can also face significant challenges. Recognizing and addressing the key risk factors for partnership disputes is crucial for small business owners to prevent disruptions and ensure smooth operations. This article explores these risks and provides practical suggestions for addressing them.
Business Strategy Conflicts
Divergent Visions and Goals
In LLCs and corporations, partners may initially align on a common objective, but over time, their individual aspirations may diverge. For example, one partner may want to aggressively expand into new markets, while another prefers to focus on consolidating current operations. These differences can lead to strategic conflicts that, if unmanaged, can escalate into serious disputes.
Addressing Business Strategy Conflicts
Strategic Planning Clause: Include a clause in the operating agreement (for LLCs) or bylaws (for corporations) that mandates regular strategic planning sessions. These sessions should be documented, and any major strategic decisions should require a supermajority or unanimous vote to ensure alignment among partners.
Practical Example
A Florida-based tech startup might have one partner pushing for a pivot towards developing consumer applications while another insists on focusing on enterprise solutions. Regular strategic planning sessions and requiring a supermajority for major decisions can help align their goals. Note: transparency is the overriding theme in avoiding partnership disputes. Transparency leads to trust and trust helps avoid conflict.
Communication Breakdowns
Ineffective Communication
Effective communication is essential for any successful partnership. Breakdowns in communication can lead to misunderstandings, mistrust, and unresolved issues. Partners might avoid discussing sensitive topics, exacerbating tensions and leading to disputes.
Addressing Communication Breakdowns
Communication Protocol Clause: Establish a formal communication protocol in the operating agreement or bylaws. This clause should include the frequency of meetings, the format (in-person, virtual, etc.), and the process for raising and addressing concerns. It should also specify the use of a shared platform for documenting decisions and discussions.
Practical Example
In a retail business based in Miami, one partner may feel that their suggestions are consistently ignored. Implementing regular check-ins and open dialogue through a formal communication protocol can prevent such issues.
Unequal Workloads
Disparity in Contribution
Perceived or actual disparities in workloads can lead to resentment and conflict. This issue often arises when roles and responsibilities are not clearly defined, leading one partner to feel overburdened.
Addressing Unequal Workloads
Roles and Responsibilities Clause: Clearly define each partner's roles and responsibilities in the operating agreement or bylaws. Include a mechanism for regularly reviewing and adjusting workloads to ensure fairness and equity.
Practical Example
In a marketing firm, one partner may handle most client interactions and project management, while the other focuses on administrative tasks. Clearly defining roles and regularly reviewing workload distribution can prevent conflicts.
Financial Disagreements
Disputes Over Finances
Financial disagreements are a major source of partnership disputes. These can include disagreements over profit distribution, reinvestment strategies, or unexpected expenses. Differing financial priorities and lack of transparency can exacerbate these disputes.
Provision to Address Financial Disagreements
Financial Management Clause: Outline detailed financial arrangements in the operating agreement or bylaws. This should include profit-sharing ratios, reinvestment policies, expense handling procedures, and requirements for regular financial reporting and audits.
Practical Example
In a construction partnership, one partner may want to reinvest profits into new equipment, while the other prefers immediate profit distribution. A clear financial plan and regular financial reviews can prevent such disputes.
Preventative Measures
- Drafting a Comprehensive Agreement: A well-drafted operating agreement (for LLCs) or bylaws and shareholder agreement (for corporations) is crucial for preventing disputes. This document should cover all potential areas of conflict, including business strategy, communication protocols, roles and responsibilities, financial arrangements, and dispute resolution procedures.
- Dispute Resolution Clause: Include mediation and arbitration clauses in the operating agreement or bylaws. These clauses provide structured approaches to resolving disputes, often being less adversarial and costly than litigation.
- Review and Amendment Clause: Partnership agreements should be dynamic documents. Include a clause that mandates regular reviews and updates to ensure the agreement remains relevant and effective as the business evolves.
Conclusion
Disputes in LLCs and corporations can be detrimental to small businesses, but many conflicts can be anticipated and mitigated through careful planning and clear communication. Understanding common risk factors—such as business strategy conflicts, communication breakdowns, unequal workloads, and financial disagreements—can help partners proactively address potential issues.
By adhering to Florida law and implementing best practices, small business owners can create a robust partnership framework that supports long-term success. If you have questions or need help navigating a current dispute, contact the Business lawyers at MSD – Business today for a free consultation.
Additional Resources
- My Business Partner Took Our Clients and Started Their Own Business – What Can I Do? W. Chase Carpenter. April 2, 2024.
- What Do I Do if My Partner Abandons Our LLC?W. Chase Carpenter. March 26, 2024.
- What to Do if My Business Partner Cleaned Out the Bank Accounts? W. Chase Carpenter. March 25, 2024.
By understanding and addressing these key risk factors, partners can foster a more harmonious and productive business relationship, paving the way for mutual success.
About the Author:
Chase Carpenter is a partner in the Business Division of Law Offices of Moffa, Sutton, & Donnini, P.A. His practice revolves around business transactions and business litigation. Mr. Carpenter handles a wide range of cases including contract drafting, partnership disputes, commercial leases, and construction litigation. These cases encompass diverse industries, including healthcare, technology, real estate investment, and government contracting.
About the Firm:
The Law Offices of Moffa, Sutton, & Donnini, P.A., also known as MSD Business, is a local business law firm in Tampa, FL, serving clients throughout Fort Lauderdale and statewide. Our firm has a long history of helping clients navigate all types of complex legal matters, including local and state tax issues. In our business law practice, we assist clients with everything from mergers and acquisitions to contract disputes, business litigation, general counsel, and more.
[1] Please note that while this article focuses on LLCs and Corporations, the key risk factors apply generally to all entity formation choices.