When starting a business, forming a partnership can be a great, cost-effective way to begin your new venture. Having two or more problem-solvers working on complex business issues can mean more ideas and more productivity, especially in the early stages of your business. Working with a partner also removes the loneliness of being a solo entrepreneur.
However, having a partner can mean you must agree before making major business decisions, like making capital investments or changing marketing strategies. This type of decision-making sometimes leads to disagreements between partners.
When resolving business partnership disputes in Tennessee, business owners have several options to consider. The best method to achieve resolution will depend on the nature of the dispute, the relationship between the partners, and the desired outcome.
The Batson Nolan team will cover five common methods for resolving small business partnership disputes in this post. We will walk you through some of Tennessee’s business partner dispute laws and offer strategies to settle partnership disputes quickly and effectively.
1. Create a Partnership Agreement
Partnership agreements are like your company’s Constitution. They set the rules of the road and allow you to resolve disputes before they happen. While Tennessee’s Revised Uniform Partnership Act does not require partnerships to have a partnership agreement, it makes clear that a written partnership agreement must be in place for it to govern in case of a dispute. Having a partnership agreement in place before an issue arises in your business means you can be confident about which rules a court will apply when handling any dispute.
What Goes into a Partnership Agreement?
A partnership agreement should lay out each partner’s roles and responsibilities. Many partnership agreements specify how partner capital accounts will be handled, who has final decision-making authority, and how profits will be divided. Additionally, partnership agreements often specify how the partnership’s intellectual property will be protected and treated, especially if one partner brings a trademark or patent to the company and the partnership plans to license it.
Under your partnership agreement, it is important to ensure that all partners have adequate information about the company’s income, expenses, and expenditures. Additionally, partners should have clear insight into the company’s financial decisions.
How a Partnership Agreement Can Help Prevent Business Partner Disputes
Your partnership agreement should help account for worst-case scenarios your business may encounter. For instance, your agreement may specify what the business will do if one partner dies or becomes incapacitated. If you fail to specify what you want the business to do in the event of your death, the Tennessee Uniform Partnership Act may then apply. While the Act may ultimately represent your wishes, sometimes partners have other desires. Again, this highlights the importance of a partnership agreement, which a skilled lawyer can help you with.
Another way a partnership agreement can help prevent partnership disputes before they happen is when one partner wants to buy out the other. A partnership agreement provides an easy roadmap for such a transaction. Or, if the partners find themselves with irreconcilable differences over the future of the enterprise, they may need to unwind the business and start over. A partnership agreement can tell the partners how to handle such a disagreement and how the partnership’s property should be divided. While even the best business people and lawyers cannot anticipate every scenario, a good partnership agreement can specify procedures for resolving future problems.
If the partnership has a written partnership agreement in place, the parties can address a preference for certain dispute resolution mechanisms, such as mandatory negotiation or mediation clauses. In the event of a major dispute, the partners can look to these provisions to guide them through the dispute resolution process.
2. Use Negotiation as a Preferred Means of Resolution
The preferred method is usually for partners to engage in direct discussions with each other and negotiate the issue at hand to resolve their differences. This is cost-effect and often keeps the relationship between the partners completely intact. However, if you encounter a novel issue or a problem well outside the scope of your partnership agreement—or if you do not have a partnership agreement—it is still important to attempt to negotiate through the issue.
When you negotiate with your partner, the aim should be collaboration and reaching a solution you can both accept. Negotiation is not a zero-sum game. Instead of thinking about negotiation as dividing a pie where someone will inevitably have to have the smaller piece, think of it as a chance to pick a flavor of pie that you both like so much that no one cares how it is divided.
How Negotiation Can Help Settle Business Partner Disputes
Choosing to negotiate with your partner does not mean you are locked in a room until you reach a resolution. In a situation like this, you might want to rely on legal advice while the negotiations are ongoing. A trusted attorney can give you an important, third-party perspective on the issues.
Negotiating partnership disputes also allows the parties to explore creative solutions and reach a mutually agreeable resolution without actively involving third parties. In very contentious negotiations, the parties may choose a third-party mediator to facilitate the negotiation process and help speed closure.
3. Prioritize Alternative Dispute Resolution (ADR) Over More Contentious Means of Resolution
ADR methods, such as mediation or arbitration, can be utilized to resolve partnership disputes. The two main methods of ADR include mediation and arbitration.
Mediation involves a neutral third party who facilitates discussions between the partners and helps them reach a settlement. Mediators straddle a line between negotiation and alternative dispute resolution. While an informal mediator might be used during negotiation, a professional mediator might be called if negotiations break down. In both cases, mediation is non-binding, and the parties can choose to settle their business partner disputes using a binding dispute resolution method regardless of the mediation outcome. The Batson Nolan team has extensive experience in mediating disputes and would be happy to help you and your partner handle any conflict that arises between you.
Arbitration is a binding dispute resolution process, like litigation. It involves a neutral arbitrator listening to both sides’ arguments and issuing a binding decision to the parties. The parties have only limited rights of appeal once the decision is made.
How ADR Can Help Resolve Business Partner Disputes
ADR is typically seen as faster and less expensive than resorting to the courts. When business partners know that their disputes will be handled swiftly and effectively, they may be motivated to either settle their disputes between themselves through mediation or accept an arbitrator’s binding resolution. In either case, ADR helps partners solve disputes and move on.
4. Consider a Partnership Dissolution or Buyout
In some cases, resolving the dispute itself is simply not an option, and you and your partner must go your separate ways. In that case, the best solution may be to dissolve the partnership. Alternatively, one partner can buy out the other’s interest.
Dissolution of a Partnership in Tennessee
The partnership agreement or applicable state laws will govern the dissolution process and specify how the debts and assets of the partnership are handled. Dissolving a partnership, however, can create disputes between the partners that require extensive negotiation, mediation, or even litigation. The steps to dissolve a partnership in Tennessee include the considerations.
Review partnership agreement
Start by reviewing your partnership agreement if you have one. It may outline specific procedures for dissolution, including notice periods, voting requirements, and other provisions. Make sure all partners agree to the dissolution. If you have any disagreements or if you are concerned that your procedures do not conform to current state laws, be sure to check with a trusted business law attorney.
Inform relevant parties
Notify all relevant parties about the partnership’s dissolution, including partners, employees, customers, clients, suppliers, and creditors. In most cases, it is important to communicate this decision in writing and provide a specific date when the dissolution will take effect.
As part of the dissolution process, the partnership should settle all outstanding debts, pay off creditors, and complete any pending contractual obligations. Assets and liabilities must be appropriately allocated among the partners.
File dissolution documents, including final tax returns
You must download and complete the partnership dissolution forms from the Tennessee Secretary of State’s Office. Once the dissolution documents are completed, submit them to the Tennessee Secretary of State’s Office. You may need to pay a filing fee, which can vary.
Inform the Internal Revenue Service (IRS) and the Tennessee Department of Revenue about the partnership’s dissolution and file any final tax returns. Consult a tax professional for guidance on this matter.
Notify other government agencies
Depending on the nature of your partnership, you may need to notify other government agencies, such as local licensing boards or regulatory bodies, about the dissolution.
Terminate business accounts, licenses, and legal obligations
Close any business accounts associated with the partnership, such as bank accounts and credit lines. Also, cancel or transfer any licenses or permits in the partnership’s name. Review and terminate any leases, contracts, or agreements the partnership entered into. Notify landlords, suppliers, and other parties about the dissolution and fulfill any obligations associated with the agreements.
Dissolving a partnership can involve complex legal considerations, especially if disputes or the partnership’s circumstances are complicated. You will want to consult with an experienced attorney to ensure that you comply with all legal requirements and protect your interests. The Batson Nolan team can help.
A primary way to terminate a business arrangement with a majority partner is to negotiate a buyout of the partner’s business interest. This usually requires something called a buy-sell agreement. A buy-sell agreement is a written contract that defines the terms of buying out a business partner. This differs from a partnership agreement and is something the partners should ideally create before starting the business or alongside their partnership agreement. In practice, most partners draft their buy-sell agreement anytime before the buyout occurs.
5. When All Else Fails, Take Legal Action
If all other methods of dispute resolution fail or the issues at hand involve serious breaches of the partnership agreement or fiduciary duties, legal action may be necessary. Partners can file a lawsuit in a Tennessee court to seek a resolution and enforce their rights. An experienced attorney can help you understand your legal options and navigate the litigation process effectively.
Litigation is often the last resort when both partners fail to settle their differences. This is because litigation is both expensive and time-consuming. By entangling your business in litigation, you may run out of both enthusiasm and funds to focus on your work. However, sometimes, a partnership dispute is so serious that only a court of law can sort out the issues.
Some instances where disgruntled business partners required litigation to sort out issues between them include:
- Breach of the partnership agreement,
- Misappropriation of business assets, and
- Failure to perform.
Once a lawsuit is filed against a business partner, it is up to the court to decide how the dispute will be settled. If the judge favors you, you could be rewarded with an order enjoining the other party’s behavior or specific performance requiring the other party to do something. You could even receive financial damages. A Tennessee business lawyer can help you navigate this process effectively. Seeking legal advice from a qualified attorney experienced in partnership disputes is crucial to understanding your rights, options, and the best course of action based on your situation.
How Batson Nolan Can Help You Handle Partnership Disputes
Entrepreneurs need an experienced and skilled attorney to help them understand and fulfill their obligations when operating a partnership. A lawyer can help draft a strong partnership agreement and the documents to help avoid legal disputes later on.
Batson Nolan has been helping Tennessee businesses since 1860. While Tennessee has changed a whole lot since then, our commitment to our clients has been unwavering. If you have questions about a current or potential partnership dispute, don’t hesitate to contact our team today to schedule a consultation.