When a business partnership dispute boils over, your first moves are the ones that matter most. Your immediate priority is to secure the business’s assets, preserve your rights, and prevent the other partner from making unilateral decisions that could cause irreparable harm.
This involves a careful process of gathering documents, understanding your legal standing under your partnership agreement and California law, and creating a clear strategy for what comes next. The path forward might involve negotiation, mediation, arbitration, or even dissolving the business.
If you are facing a serious dispute with your business partner and need to understand your options, call Wade Litigation at 888-705-5059.
Contents
- 1 Key Takeaways for Handling a Partnership Dispute
- 2 Your Immediate Priorities: How Do You Protect the Business Right Now?
- 3 The Next 48 Hours: What Information Should You Be Gathering?
- 4 Understanding Your Legal Position: What Are Your Rights and Obligations?
- 5 Choosing Your Path Forward: What Are the Options for Resolving This?
- 6 Frequently Asked Questions About Business Partnership Disputes
- 7 Take Control of the Situation
Key Takeaways for Handling a Partnership Dispute
- Act immediately to preserve business assets and information. This prevents your partner from making unilateral decisions and establishes a financial baseline for any future legal action.
- Your partnership agreement is the primary rulebook. It dictates the process for dispute resolution, buyouts, and dissolution, but California law provides default rules if no written agreement exists.
- Litigation is not the only option. Negotiation, mediation, and arbitration are private, efficient, and frequently less costly alternatives to a public court battle.
Your Immediate Priorities: How Do You Protect the Business Right Now?
Your partnership is in crisis, and the business you’ve poured your life into is now at risk. Every shared bank account, client relationship, and piece of company property becomes a point of conflict.
A wrong move could give the other partner an advantage. They might try to lock you out of accounts, contact key clients behind your back, or remove company assets. Action must be taken to stabilize the situation before more damage is done.
A Three-Step Stabilization Plan
Secure All Financial and Digital Access
It is tempting to immediately change passwords or lock your partner out of accounts. However, this is sometimes seen as an aggressive act and may even violate your duties. Instead, the initial goal should be to conduct a full audit and preserve information.
- What to do: Log in and download statements from every financial account, including bank accounts, credit cards, and any lines of credit. You want to create a complete snapshot of the business’s financial health as it stands right now. This provides a baseline for any future legal action.
- Preserve access: Ensure you have access to essential software and digital platforms like social media accounts, client management systems, and website backends.
- Make copies: Make copies of any information you access without altering it. The focus is on preservation, not escalation.
Avoid Unilateral Actions
It is common to want to take immediate, decisive action, such as firing a shared employee, moving money to a separate account, or telling clients your side of the story. Acting alone without consulting your partnership agreement or legal counsel might be a breach of your own duties. For example, moving funds could be interpreted as a breach of your fiduciary duty, which is the legal obligation to act in the best interest of the partnership.
Instead of taking matters into your own hands, meticulously document your partner’s actions. If they are acting unilaterally, keep a detailed, dated log of every incident. This record-keeping is a powerful defensive measure that demonstrates a calm, methodical approach to the dispute.
Open a New, Separate Line of Communication
Stop using shared channels for any sensitive communication. Move all discussions related to the business dispute away from company email or text message chains where your partner has access. Create a new, private email address to be used for these matters.
All future communication should be in writing. Keep your language professional, concise, and fact-based. A clear, written record prevents misunderstandings and “he said, she said” arguments. It shows that you are proceeding in a deliberate and careful manner, which is valuable in any formal dispute resolution setting.
The Next 48 Hours: What Information Should You Be Gathering?
Once you’ve taken steps to stabilize the business, your focus shifts to gathering the documents that define your partnership.
The Most Important Document: Your Partnership Agreement
Locate the original signed copy of your partnership agreement and any amendments. This document is your rulebook. We will review it to find key clauses that dictate how to proceed, including:
- Dispute Resolution: Does the agreement require mediation or arbitration before a lawsuit is filed? Many agreements include this to avoid costly court battles.
- Roles and Responsibilities: What does the document say about each partner’s authority and decision-making power?
- Buy-Sell Provisions: Is there a pre-agreed method for one partner to buy out the other? This provides a clear exit path.
- Dissolution Clause: What are the required steps for winding down the business if it becomes necessary? This process is guided by California’s Corporations Code.
What If You Don’t Have a Written Agreement?
Many partnerships operate successfully for years on a handshake, but the absence of a written agreement does not mean you are without rights. When a formal agreement doesn’t exist, California law provides a set of default rules.
In California, the Revised Uniform Partnership Act (RUPA) governs how the partnership operates. This statute dictates how profits and losses are shared (usually equally), defines partner responsibilities, and sets out the process for dissolution.
Assembling the Financial Picture
Work on gathering the following documents to provide a comprehensive and clear view of the business’s finances:
- Bank and Credit Card Statements: Collect at least the last three years’ worth.
- Tax Returns: Both federal and state tax returns for the business.
- Profit and Loss Statements.
- Balance Sheets.
- List of Assets and Liabilities: This should include all company property, equipment, real estate, and outstanding debts.
Understanding Your Legal Position: What Are Your Rights and Obligations?
What Is a “Fiduciary Duty” in a Partnership?
A fiduciary duty is a legal obligation to act in the best interest of the partnership and your partner, not your own self-interest. It is one of the highest standards of care recognized by law. This duty includes two core components:
- Duty of Loyalty: You cannot secretly compete with the partnership, take a business opportunity that belongs to the company for yourself, or engage in self-dealing transactions that benefit you at the partnership’s expense.
- Duty of Care: You must not engage in grossly negligent or reckless conduct, intentional misconduct, or knowing violations of the law in your management of the business.
Identifying a Breach of Contract
A breach of contract occurs when one partner violates the specific terms outlined in your partnership agreement. This is a more straightforward claim than a breach of fiduciary duty because it is based on the explicit language of your business contract.
Common examples of breaches in partnership disputes include:
- Failing to make a required capital contribution.
- Making a major business decision without the required consent of the other partner(s).
- Improperly withdrawing funds from the business in a way the agreement forbids.
Misappropriation of Assets and Fraud
This type of misconduct goes beyond a simple disagreement or a contractual breach. It involves intentional deceit or theft for personal gain.
Signs of potential fraud or misappropriation may include:
- Unexplained withdrawals or transfers from business accounts.
- Company funds being used for personal expenses such as vacations, cars, or home renovations.
- Manipulating financial records to hide poor performance or conceal theft.
If you suspect fraud, we recommend speaking with an attorney before confronting your partner. An early confrontation could give them an opportunity to destroy evidence or further conceal their actions.
Choosing Your Path Forward: What Are the Options for Resolving This?
Going to court is not the only option for every escalated business partnership dispute. Alternative methods are increasingly used to save time, money, and preserve privacy.
Comparing the Main Avenues
Negotiation: The Direct Approach
Negotiation is a structured discussion, typically conducted between business litigation attorneys representing each partner, with the goal of reaching a mutually agreeable settlement. It is best for situations where communication has not completely broken down and both parties are motivated to find a practical, business-oriented solution.
The primary benefit of negotiation is that it is almost always the fastest and least expensive option.
Mediation: A Guided Conversation
In mediation, a neutral third-party mediator facilitates a conversation to help you and your partner find common ground. The mediator does not make a decision for you but instead helps de-escalate the conflict and guide the parties toward their own solution.
This process is well-suited for disputes where emotions are running high. Mediation is confidential and non-binding. If it doesn’t lead to a resolution, you still have the option to proceed to arbitration or litigation.
Arbitration: A Private Trial
Arbitration is a private process where you present your case to a neutral arbitrator (or a panel of them) who acts as a private judge and makes a binding decision. This process is governed by laws like the Federal Arbitration Act and the California Code of Civil Procedure.
It is sometimes required by a partnership agreement. Even if not required, it is a good option when you need a final decision but want to avoid the publicity and formal procedures of a public court. The proceedings are private and typically faster than a lawsuit.
Litigation: The Last Resort
Filing a lawsuit in court is known as litigation. This path is generally best for cases involving serious misconduct like fraud, or when the other party is completely unwilling to negotiate or participate in alternative dispute resolution in good faith. Litigation provides access to the full power of the court system, including formal discovery (the process of gathering evidence) and the ability to obtain enforceable court orders.
Frequently Asked Questions About Business Partnership Disputes
This depends almost entirely on your partnership agreement. If it includes a buy-sell provision, that pre-agreed process will govern how a buyout occurs. If not, you may need to negotiate a buyout. In some cases where an agreement cannot be reached, the only option may be to seek a court order for the dissolution of the partnership, where a buyout could become part of the court-supervised resolution.
How much will it cost to resolve this dispute?
The cost varies widely based on the path taken. A directly negotiated settlement will cost significantly less than a litigated case that proceeds to a trial. Our goal is always to find the most efficient path to resolution and provide you with a clear understanding of the potential costs at each stage.
My partner is running up debts on the company credit card. Am I liable?
In a general partnership, partners are sometimes held personally liable for debts properly incurred by the business. This is why you must take swift action to protect the company’s finances and legally separate yourself from your partner’s harmful actions if they are breaching their duties and misusing company assets.
How long does it take to resolve a partnership dispute in California?
The timeline varies dramatically. Mediation is sometimes completed in a matter of weeks or a few months. Arbitration is typically faster than court, taking less than a year to complete. A lawsuit that goes through the entire litigation process takes several years to reach a final conclusion.
Take Control of the Situation
You do not have to let the dispute dictate the future of your business. By methodically securing your assets, gathering key documents, and understanding your legal options, you shift from a reactive position to a proactive one.
Let us help you develop an action plan. Call Wade Litigation for a confidential discussion about your case at 888-705-5059.