Business disputes come in many shapes and sizes. One of the most common types of lawsuits I see is partnership disputes. These disputes are comparable to divorces, so much so that attorneys sometimes refer to them as “business divorces.”
These disputes are emotional, can escalate quickly, and can be quite costly. During litigation, the stress level for both parties runs high. For the parties, these cases are the proverbial “save the farm” case where the business is the principal asset for each partner. As a result, while an amicable resolution would be ideal, some disputes are intractable, and the parties’ shared assets must be divided through litigation.
Because of the intensely personal relationship between partners in closely held businesses, as well as their strong sense of identity with the business itself, a lawyer’s role tends to be both one of advocate and business therapist. As in divorce, clients frequently feel a deep sense of betrayal as well as financial loss.
Partnerships make sense because no individual is good at everything. Partnerships are a vehicle through which each party can focus on doing what he or she does best. In partnership, people with complementary skills and resources come together, and the benefits of collaboration can be significant. While there is a large upside to dividing duties among two or more partners, what is often overlooked is that the parties often either don’t share the same vision or are simply not partner material.
I find that conflicts arise most often arise when one partner contributes expertise or labor, while the other provides capital — and the relationship between the two isn’t clearly defined. Disputes often arise in these cases because there is no common understanding of each side’s contribution — be it labor or capital. Without clear benchmarks or agreed-upon valuations, both parties can end up overestimating the value of their respective contributions, whether it’s work or money.
While capital can be clearly calculated by both sides, the value of labor is often much harder to measure. Because of this, the partner providing labor often feels that they are contributing more effort and time than the partner who only invested money — or that they carry the weight of daily operations while the other is relatively passive.
Furthermore, when the duration or value of labor isn’t clearly defined, or if the compensation for that labor is below or above market value, these conflicts can naturally arise.
To minimize these tensions, it’s important to separate the two roles of a working partner — one of whom provides labor and the other who invests capital.
Clarifying and Resolving Conflicts Through Contracts
You can reduce potential conflicts by clearly outlining the value of labor, incentives, and bonuses within a partnership agreement or an employment-type contract. Structuring it similarly to an employee agreement — specifying expected work periods, hours, and performance goals — helps make things more objective and transparent.
It’s also helpful for both parties to understand the market value of the working partner’s contribution and to prepare alternative plans, such as replacement labor, in advance.
The partnership agreement should also clearly state how responsibilities are divided, and how additional capital will be raised when
needed. It’s easy to say, “We’ll just each contribute cash according to our ownership share,” but that’s not the real issue — the problem arises when someone can’t produce that cash. None of us have unlimited funds, and people think differently. In reality, when the business truly needs money, not every investor is quick to contribute.
The agreement should also specify which matters require mutual consent (such as asset sales or M&A), how decisions will be made if partners can’t agree, and what happens if one partner stops participating in management or decides they no longer want to be in the partnership.
Although it’s not easy to bring up these topics in the early stages of a new partnership, this is exactly when it’s most important to meet with an attorney. Attorneys help bring these difficult but necessary conversations to the surface.
Think of it as creating an opportunity to express the fears and concerns buried deep inside — and to talk about them openly before they turn into bigger problems.