Business partnerships are usually started with a shared vision and the best of intentions, and the goal of blending talents and resources to make a profit. The expectation is that partners will act honorably and for the good of the business.
But these relationships are like any others – it takes work and a great deal of trust. Sometimes things don’t work out. Some business disputes are minor, but others, including embezzlement, abandonment, and intellectual property rights are more serious, and often end up in court.
Let’s take a look at common business partnership disputes.
Monetary disputes among business partners are common, and the most prevalent of these happens when the partner who controls the money embezzles funds.
In most partnerships, one partner has the operational expertise and the other the financial acumen. The operations partner doesn’t always know what’s going on with the money, so if the person in charge of finances is intent on embezzling, they can do things like inflate expenses or change business accounts to personal accounts, for example.
If your business is a general partnership, each partner has unlimited authority to transact business, pay themselves or move money around, unless this is limited by a written partnership agreement or his actions violate his good faith duties to act in the partnership's best interest. A corporation or LLC usually has an operating agreement that defines each partner’s function, which makes it easier to establish embezzlement.
Of course, embezzlement destroys trust between partners and can devastate a small business. Options for dissolving a business based on thievery depend on the legal structure of the company. Businesses organized as general partnerships can be dissolved automatically, but to dissolve a business organized as a corporation or limited liability company, or LLC, will require filing paperwork with the state.
Your first step, after discovering financial malfeasance, is to contact an experienced business and litigation attorney to guide you through the legal process, including:
You’ll need real evidence for court, so look for a pattern of theft. It’s not enough just to accuse someone, because humans do make mistakes or there might be an accounting error.
The next steps:
Place controls on all accounts and track every penny coming in and going out.
Require detailed receipts for every expense, no matter how small, and make sure these receipts include the merchant’s own receipt form or automated paper receipt, with details of all items purchased.
One primary place to look for evidence is withdrawals through an ATM from a company debit or credit card.
In the case of a partner taking unauthorized funds from a business, there are two things happening.
- Fraud. Using money taken under a business pretext and using it for personal reasons or diverting funds to something else is considered fraud. Your partner lied, and because you relied upon them telling the truth, you believed them. You suffered losses or damages due to their deceit.
- Embezzlement. Embezzlement is the theft of company money or a business asset by a person in a position of trust. Your business partner has broken their fiduciary duty to protect the company.
You are entitled to recover civil financial damages for the breach of fiduciary duty, and the money or assets that were stolen. That breach of duty also puts your company at risk, and any resulting damages to your company’s performance and any financial impact are added to the civil damages.
Your partnership may have started with both of you making decisions together and co-managing your business. But as time goes on, you notice that your partner is not carrying their weight in day-to-day operations.
The best way to solve this issue is to simply talk with your partner and resolve the situation, but sometimes an agreement cannot be reached and their lack of participation is hurting the business. There are some possible legal remedies, including dissolving the partnership via buyout.
You could also bring in third-party investors to help make decisions, remove the partner as an employee but keeping them as a shareholder, or if nothing else works, resolving things in court.
If you don't have a management agreement in place that clears the way for one partner to buy out the other, you can bring a civil suit to force a buyout or to seize control of the business. A judge can set the price for a buyout or order the liquidation of the business, depending on state law and the legal structure of the business.
Intellectual property can come up in two different types of partnership disputes: breach of confidentiality and intellectual property ownership.
Also known as a non-disclosure agreement, a confidentiality agreement is a common document most businesses use to protect trade secrets, proprietary information, and intellectual property.
Running a growing organization means sharing information internally, but sharing this information with a competitor or using the information to start a competing business is considered theft. Violating a confidentiality agreement is a breach of contract that can mean legal action.
If the company was formed based on the intellectual property of one of the partners, that partner can take steps to protect it against being considered company property. There should be clear documentation when the company is started that the individual owns the intellectual property and it is licensed to the organization.
Per the agreement, if there’s a dispute, the company license can be revoked by the individual. But if there is no documentation, the dispute may end up in court, and it’s likely the judge will rule that the intellectual property belongs to the company, meaning the person who created the IP is out of luck.
If you find yourself in a serious dispute with your business partner, the professionals at Griswold Law can help guide you through the process to legally resolve the issue. Our team is consistently appointed as a receiver by Courts across California to take control of and preserve businesses and assets in partnership disputes.
Contact one of our professionals today to discuss your concerns.