A business partnership is a group of two or more people who share in the profits and ownership of the business. Their thinking is that combined efforts can maximize the potential profitability of the venture.
Business partnerships often start with the best of intentions. Partners can work together harmoniously for years, leading to the business’s success. There are many cases where partnerships are beneficial for everyone involved in the long term.
However, some partners can become difficult or impossible to work with. One partner might become detrimental to the entire operation. In this situation, you have options, and you might remove the toxic business partnership from their leadership in the business.
To best identify your options when dealing with a toxic partner, you need to consult with a business litigation lawyer immediately. Many partnership disputes require legal action in court, so you want a skilled litigator on your side to protect your business.
Some Partnerships Can Run Into Legal Issues
However, things can sometimes go sour between the partners. Whether it is a disagreement about the direction of the business or a personality conflict, people sometimes learn that they can no longer work together. A partner may not be willing to simply step aside. They may have also invested significant time, effort, and money in the business and do not want to go away quietly (or at all). You may need legal intervention to force a partner out of business.
An agreement between the partners will govern a partnership. This agreement is a binding contract between the partners. The partnership agreement lays out the terms of the association that everyone must follow. Each partner has rights and obligations under the terms of the agreement.
The Disputes Clause Is the Key to Any Disagreement
One of the most crucial parts of the agreement is the disputes clause. Partnership agreements should always include a framework for how disputes are to be settled or handled. The disputes clause is the first place you will go when you disagree. Hopefully, you sought help from an experienced business lawyer before you signed the partnership agreement. They will have drafted a practical and commonsense disputes clause that you can now consult for help.
So much of the process for removing a toxic business partner will need to proceed according to the exact language of the partnership agreement. Each case can be different, depending on the language the partnership initially used. Hopefully, your dispute clause contains language specific to your situation, not boilerplate. Otherwise, you can have difficulty using the language to resolve your problem when you need it.
You May Consider Mediation Before the Court
A dispute clause term may require you to mediate any dispute with a partner. Mediation is a useful option because you get assistance in talking through disagreements in a way that can keep you out of court. Either way, you should make a concerted effort to communicate with the partner to avoid a wider conflict. Your business may suffer when there is protracted litigation. However, it can also be held back by a problematic partner making your life harder.
If your partnership agreement calls for it, you may hold a formal dispute resolution meeting with the partner. Here, you will meet one-on-one with your partner to discuss your issues.
You Might Remove Partners Without a Judge Needing to Do It
The partnership agreement may have a provision that governs how and when you can remove individual partners. It may not even be necessary for one partner to have committed a breach of the partnership agreement for removal from the partnership.
For example, if a certain number of partners vote to remove one partner, they can be rid of them. This way, you will only go to court if the other partner sues you over their removal. At this point, you have already gotten rid of the toxic partner.
When you are involved in a professional partnership, it makes sense to include such a provision. One partner’s acts can affect the partnership’s reputation and financial stability. For example, one physician’s careless acts can harm an entire partnership of doctors. The other partners can trigger the provision that allows for expulsion without even risking the dissolution of the partnership or having to go to court in the first place.
Removing a Partner Is Not Always Easy
While you can remove a bad business partner in theory, the reality is that it can be a complex process. If negotiations to resolve the problem fail, you can end up needing to go through a more extensive procedure to eliminate the partner. In many cases, you can end up in court.
Partnership disputes are among the most emotional and contentious. A partnership share represents someone’s livelihood. They have their ideas for running the business and fight for their interests. When two people have worked closely together and have a falling out, the dispute can be even more emotional.
Be Careful Because the Other Partner May Try to Remove You
Just like you can try to force out a bad business partner in court, someone else can try to do the same thing to you. The partnership agreement and state law give you rights. If someone is wrongfully trying to force you out of the partnership, you can file a lawsuit against the partner personally or the partnership.
One thing that you need to be extremely careful of is that forcing out a partner can bring down the entire partnership. There are times when toxic situations just cannot be resolved. The partnership agreement may allow the dissolution of the whole partnership when an agreement cannot be reached. Alternatively, an intractable dispute can mean the end of the partnership.
Removal Can Depend on the Type of Partnership
In general, there are two types of partnerships:
- An at-will partnership is for an indefinite duration, and it exists through the consent of all the partners. There is no agreement, and default terms govern it in a Uniform Partnership Act.
- A partnership through an agreement exists contractually, and the agreement governs the term of the partnership.
If you have an at-will partnership (which you really should avoid if possible), any partner can dissolve the entire partnership whenever they want. If you try to remove a partner in an at-will partnership, it will mean the end of the partnership. An at-will partner does not even need a reason for wanting to dissolve the entire partnership, so removal will undoubtedly dissolve the entire partnership.
A Judge Might Dissolve the Partnership Instead of Removing the Partner
In other cases, a judge will order the dissolution of the entire partnership. When the partners cannot agree about closing down the business or buying out one of the partners, the judge can order the dissolution of the entire partnership. The judge can determine that some people cannot work together, and dissolution is in everyone’s best interests. Thus, you may be playing a dangerous game if you take any dispute with a partner to court.
The other partner can ask the court to dissolve the partnership entirely if you are trying to remove them. Just as you claim they are toxic, they may also raise similar allegations about you. They can argue that it is impossible to operate the partnership per the terms of the agreement. Faced with either addressing the specific situation or ordering the dissolution of the entire partnership, the judge can opt for the latter.
To get the results you want from a court case, you need a highly experienced business litigation attorney representing your interests to the judge. The right attorney can present your arguments that removing the partner and preserving the remaining partnership is the best move.
Can You Resolve the Matter Out of Court?
You may be better off resolving this before taking your case to court to remove a partner. The best outcome is negotiating a settlement with the partner without litigation. The best outcome in litigation is when you avoid it entirely.
Here are some ways that you may resolve a partnership dispute:
- You can resolve the disagreement and remain in business with the partner.
- You can buy out the other partner’s interest in the partnership.
- You can amend the partnership agreement to resolve the dispute and change the terms of the relationship between the partners.
Other Ways to Deal with a Bad Business Partner
In addition, there are other moves that you can make that can sever your relationship with the other partner short of going to court can include:
- You can opt to sell the business entirely to a new owner. This process may involve various disputes, including the proper business valuation.
- If you are a majority partner, you can conduct a “freeze-out merger” to force the other partner out entirely. It is legally possible to run a freeze-out merger per state law and legal precedent, although you must closely follow the law. If you are a majority partner, you may owe a fiduciary duty to the minority partners, so take care.
- If the partnership agreement includes a buy-sell provision, you can buy out the partner at a price provided in the agreement or using the formula provided. Again, you may have to defend your business valuation in court.
Again, you may be playing danger if you take these steps to eliminate a toxic partner. They always have the right to go to court to seek the dissolution of the partnership. The other partner may claim that dissolution is necessary to protect their rights and interests. You can prevail in court, and the judge can order the removal of that partner, but your entire business can be at risk.
The partner can also sue you for wrongful dissociation. If the partner can successfully prove their case, they can hold you personally liable to both the partner and the partnership. Ideally, you should talk with the other partner to settle your disagreement.
One common way to resolve conflict is to engage a mediator to help the parties discuss the issues. A mediator has no power to order a resolution, but they can facilitate communication. The mediator can highlight points of agreement and help the party move towards more common ground.
You may even take your case to arbitration if the partnership agreement requires it or the two partners agree to use that method to resolve the dispute.
You Might Not Avoid Litigation With the Partner
However, you may also decide that the relationship is beyond salvaging and look for ways to eliminate the partner. While negotiated settlements are preferable, taking your case to court may be unavoidable. Nothing says that you need to remain in business with a toxic partner who can put you personally at risk. You can end up personally liable for something the partner does, affecting your finances and credit. The entire business can be at risk no matter what.
You are not powerless in this situation. The toxic partner owes their fiduciary duties to the partnership. If they have done anything to violate their duty of care or loyalty, you can take action against them. The partner can be personally liable if they have caused damages.
Always Get a Lawyer in a Partnership Dispute
You should consult with a business litigation law firm in Chicago at the outset of a partnership dispute. Your actions matter during the disagreement. You need to pay close attention to the partnership and its long-term viability.
To help you resolve a partnership dispute, an attorney can:
- Review the partnership agreement to help determine your rights and responsibilities.
- Communicate with the relevant partner (or their attorney if they have one) on your behalf.
- Help you think of strategic alternatives to resolve the dispute.
- Assist you in taking legal action against the partner if necessary.
- Taking your case to court to enforce the terms of the partnership agreement.
- Defend you in court if the partner accuses you of wrongful dissociation.
Seek assistance from an experienced business litigation lawyer in Chicago, IL immediately.