People rarely enter into a business partnership expecting conflict. Unfortunately, this is the case for many business owners who come to disagree with their partner about fundamental issues related to the business or who suspect illegal activity, such as embezzlement. To avoid this type of conflict and the lengthy and costly litigation that often accompanies it, many business partners include provisions in their business formation documents dictating how the partners must go about resolving issues or the steps required to dissolve the relationship. However, even business partners who prepared for potential conflict in the future face an uphill battle in attempting to resolve business-related issues, so if you have questions about your own partnership, it is crucial to speak with an experienced business attorney who can explain your legal options.
Common Causes of Partnership Disputes
Business partners are legally bound to fulfill certain fiduciary duties to each other. Unfortunately, these obligations are often breached, which can result in a conflict that could potentially harm a business’s reputation, growth, and profits. While some partnership disputes are caused by personal conflicts, the most common causes include:
- Misappropriation of assets or business opportunities;
- Fraudulent activity;
- Breach of contract;
- Interference with a contract;
- Real estate disputes;
- The division of assets during dissolution;
- Lost business opportunities; and
- Differing visions for the company.
Business partners who find themselves in conflict over these types of issues have a number of options, including mediation, which can be an effective way to resolve a dispute without going to court.
The mediation process is non-adversarial, which makes it more likely that once the parties are able to reach an agreement, they will be able to maintain a cordial relationship or even stay in business together. Rather than being pitted against each other, parties to a mediation are encouraged to work together with the help of a neutral third party to reach a solution that is satisfactory to both partners. Mediation also allows the parties to keep the dispute private, which can help protect the parties’ personal reputations as well as business operations. Unfortunately, mediation is not always possible, especially when a case involves allegations of fraud or criminal activity. Even parties who choose to attempt mediation should have the guidance and support of an attorney, so if you are considering mediation to resolve a business dispute, it is important to contact a knowledgeable business attorney who can protect your interests.
Right to an Accounting
In Florida, some business partners have what is referred to as a right to an accounting, which is a cause of action that allows partners to receive an equitable settlement of claims and liabilities. Although the right of accounting is not available to every partnership, the accounting can automatically proceed if both parties admit that they were part of a partnership. During an accounting, every transaction related to the partnership is investigated to ensure that there was no fraudulent activity. Accountings are conducted by an impartial third party, usually a qualified accountant, who will review the books and records of the partnership to determine how much each party is owed. The parties may also be required to submit to an oral examination.
The costs for a partnership accounting, including attorneys’ fees are usually payable out of the partnership. Although courts often award the entire bill for attorneys’ fees to one of the partners if there is evidence of misconduct, a party must explicitly seek an accounting to recover these fees. Accounting claims tend to be far less costly and acrimonious than other business-related causes of action.
In some cases, both partners agree that the simplest way to solve a dispute is to dissolve a company. In these cases, the parties can opt for a voluntary dissolution, which can be a relatively simple process if the parties formed a written partnership agreement containing provisions outlining how assets or debts would be divided in the event of a dissolution. However, even if there is no partnership agreement, the parties must abide by certain rules when dissolving a company. For instance, although general partnerships are not required to file a form when dissolving a partnership in Florida, it’s still a good idea to submit an official Statement of Dissolution with the Division of Corporations. This document must:
- Provide the name of the partnership;
- State that the partnership has dissolved and is winding up its business; and
- Be signed by a partner.
At this point the partners will need to take additional steps, including:
- Completing any ongoing partnership work;
- Selling some or all of the partnership’s assets;
- Paying debts; and
- Distributing remaining assets.
Additionally, the company’s funds must be distributed in a certain order. Usually, creditors must be paid first, after which partners can collect their capital contributions. If anything is left over, the partners can then distribute it either in accordance with the partnership agreement or as they otherwise see fit. The partners should also notify creditors and customers that the partnership is dissolving, either by publishing a notice in the local newspaper or sending individual written notifications. Finally, the partners will need to notify the Department of Revenue that the business is being dissolved, so that the proper tax adjustments can be made. It’s also important to keep in mind that if a business is registered in more than one state, the partners will need to terminate their rights to conduct business in those states separately.
If a company’s partners do not agree to dissolve a business, one of the partners will be required to file a civil action in court. In these cases, the court will decide whether the company should be dissolved and will also divide and distribute any assets.
Contact an Experienced Florida Business Attorney Today
In business partnerships, each partner is personally liable for the debts and obligations of the company. This means that partnership disputes affect a business’s future, but also each partner’s financial and personal well-being. At Clearwater Business Law, we realize how much is at stake for those involved in partnership disputes, so if you have a conflict with a business partner, please call us at (727) 785-5100 to speak with an experienced business attorney who can evaluate your case.