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How to Avoid Partnership and Shareholder Disputes

There can be many reasons why partnership or shareholder disputes happen. In many cases, partners do not define their expectations in the form of a shareholder or partnership agreement before the start of the business. However, even in written agreement cases, there is often room for disputes concerning distributions, ownership percentages, governance issues, compensation, and even day-to-day management. 

Business partners will sometimes conclude to part ways for many reasons, and sometimes, the split will cause disputes.  

BUSINESS PARTNER DISPUTE LAWS

New Jersey has established statutes that govern corporations, partnerships, and LLCs. However, these statutes are designed around a standardized set of rules rather than a specific agreement between business policies and protocols. 

The best practice would be to execute a strong agreement that addresses most business issues before any disputes arise. 

PARTNERSHIP AND SHAREHOLDER AGREEMENT

The key to forming a solid partnership is a Partnership Agreement, LLC Operating Agreement, or Shareholders Agreement, depending on the business entity.

The more specific your agreement, the better chance you will have if the dispute ends in a legal battle. A substantial agreement should contain at least 7 of the following items.

  1. Contributions: The agreement must define what each partner will put forth in the amount of money, time, effort, customers, and anything else needed to run the business.
  2. Distributions: The agreement must outline how profits are distributed as well as partner salaries.
  3. Ownership: The agreement should carefully describe how ownership interests are to be handled in case of a partner’s death or sickness, retirement, or any other scenario, such as a partner leaving.
  4. Decision Making: The agreement must define how day-to-day management and long-term decisions will be made and by whom.
  5. Dispute Resolution: The agreement must specify how disputes are handled in a transparent resolution process.
  6. Critical Developments: Your partnership agreement should address possible scenarios and concerns, such as a buyout, retirement, and any other circumstance under which you can modify the partnership.
  7. Dissolution: Your agreement should also include what steps should be taken to end your partnership legally. Each state requires different stipulations to dissolve and process partnership dissolutions.

PARTNERSHIP AND SHAREHOLDER DISPUTES

In any business, partnership disputes will inevitably arise. Most of the time, partnership and shareholder conflicts can be resolved based on the agreement established at the beginning of the partnership. However, some disputes may not be quickly resolved, and these disagreements might lead to the dissolution of the company.

HOW TO SETTLE DISPUTES BETWEEN BUSINESS PARTNERS

If the disagreement cannot be resolved, it might need to go to litigation. Litigation can be both time-consuming and costly, and it can be a part of the public record that exposes the company’s inner workings and conflict. 

Other options are available. One is Arbitration, which is conducted similarly to a trial, but it is not susceptible to public records and is led by an arbitrator. The other is mediation, in which a trained, neutral mediator attempts to facilitate a settlement between the parties.

The best option is to have a well-drafted partnership agreement established and in place for a business to ensure successful, conflict-free operations.  

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