Many business owners greatly value the ability to not only work collaboratively but also to have the support of one or more partners. Partnerships usually afford owners more security, more start-up capital, and more ideas on how the business should be run. Unfortunately, though most partnerships start off smoothly, disputes can eventually arise in these situations. There are various types of partnership disputes, and, while some can be resolved amicably, others are more litigious. 

Common Types of Partnership Disputes

– Partnership Agreement Interpretation (ambiguities in the partnership agreement)

– Differing Visions (the partners view the business and its future differently)

– Partner Misconduct

– Misuse of Partnership Resources

– Fraud, Misappropriation or Embezzlement

– Negligence or Breach of Fiduciary Duty 

– Ownership/Management Disputes

– Business Mergers and Acquisitions

– Disassociation (Share Buyout) and Dissolution

Before Acting on Your Dispute

Before you act on your partnership dispute, your first step should be a complete and thorough review of your partnership agreement. It is advisable that you go over your agreement with an attorney to get a clear understanding of your obligations and options. Partnership agreements typically provide specifications regarding the process for dissolution, buyout, and management of the business. 

In Arizona, businesses that do not have a partnership agreement will be required to abide by the Uniform Partnership Act.

Ways to Resolve Disputes

Renegotiation

If the partners’ ultimate goal is to continue the business, the most effective approach to resolution is to renegotiate the terms of the partnership. Often, terms can be added or removed from the partnership agreement that will be amenable to all parties. Another good aspect of negotiating is the ability to revise the agreement to address the issues brought up in the current dispute should they arise again in the future. 

If the relationship cannot be salvaged, however, there are other ways to find a resolution: 

Buyout or Selling of a Partner’s Interest

Just because one partner desires to leave the partnership, this does not necessarily mean the partnership must be dissolved.  If the remaining partners would like the partnership to continue, they would need to follow the process for dissociation of the partner that would like to separate.  

Dissociation usually entails the other partners purchasing the leaving partner’s interest.  The process involves an assessment of the fair market value of the partnership as a whole, as well as the value of the individual equity stake of the dissociating partner. You will want to work with an attorney to ensure all parties are getting a fair and well-thought-out offer.

Dissolution

Before dissolving your partnership, make sure that you completely understand the regulatory and financial ramifications.

Debts and Asset Distribution – You and your partner(s) must decide on a method of paying all outstanding debts. In the event that the partnership does not have ample liquid capital, you will need to unload partnership assets. In Arizona, you cannot lawfully dissolve the partnership without paying all outstanding creditors.

Notifications & Filings – While the partnership is not required to file formal dissolution papers, filing a Statement of Dissolution with the Arizona Secretary of State is inexpensive, and it will withdraw any outstanding Statement of Partnership Authority. It is also recommended that you notify the Arizona Corporation Commission.

Tax Issues and Managing Final Tax Returns – Your partnership does need tax assessment before dissolution, but you must cancel any transactional privilege tax authority provided to your business through the Arizona Department of Revenue. Also, if your business maintains assets after all creditors have been paid, any dividends of the dissolution will be viewed as income and taxed accordingly. 

Terminating Existing Obligations – Other matters which should be addressed upon dissolution include: termination of business permits and licenses; voiding any contracts, leases and agreements; closure of any bank accounts, supplier accounts, and business relationships related to your partnership.

Litigation

When misconduct allegations, like embezzlement and fraud, are made against a partner, legal action may be the best recourse.  This is because, unless the accused partner is forthcoming with the details of their actions, the accusations may need to be proven through the presentation of evidence in court. Issues as complex as these often require the insight and assessment of an experienced litigator. 

Litigation is also nearly unavoidable in cases where an agreement regarding negotiations, dissociation, or dissolution cannot be reached.

Moving Forward

Things to keep in mind when deciding how to handle your partnership dispute are the effect it can have on other business staff, employees, and clientele, the potential for depletion of the business’ assets, how lenders and suppliers may view the business moving forward, and added scrutiny of the partnership’s internal operations by regulatory agencies and tax auditors. 

Nevertheless, the sooner your partnership dispute is resolved, the sooner you can get back to business. Whether that means rebuilding the existing partnership or starting fresh is up to you. 

Contact Counxel Legal Firm

If you would like legal assistance, contact a member of Counxel Legal Firm at the number 480-536-6122 or at intake@wordpress-457010-3165254.cloudwaysapps.com to set up a consultation. 

This article is intended for informational purposes only and does not constitute legal advice for your specific situation. Use of and access to this article does not create an attorney-client relationship between you and Counxel Legal Firm. Please contact intake@wordpress-457010-3165254.cloudwaysapps.com or 480-536-6122 to request specific information for your situation.

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