On Partnerships and Disputes
Feb. 25, 2023
What is a partnership, and what are the differences between a general partnership and a limited partnership?
A partnership can be formed as either a general partnership or a limited partnership and requires a minimum of two business owners (in a general partnership, all partners are liable for company debts; whereas, in a limited partnership, only the general partner is liable for company debts). Both types of partnerships are usually terminated after a partner's passing or withdrawal from the partnership. In both types of partnerships, the profits of the partnership entity are subject to personal taxation by the individual partners. (Note: it is advisable to set up a limited liability company (LLC) or a corporation instead of a partnership if limiting the liability of partnership debts is important to you).
What does a partnership dispute mean? What are my next steps if I am involved in a partnership dispute?
A wide variety of situations might give rise to partnership disputes. Some of the more common examples are listed below.
A partner leaves to start a competing company
A partner leaves the company and is attempting to take clients with them
A partner is using the business as leverage for outside self-interest & self-dealing
A partner is making important business decisions without getting their partner's input
A partner is failing to keep the other partners informed about major business issues
A partner is preventing other partners from accessing financials or other records
A partner is violating the terms of the partnership agreement in some other way
If you are in a partnership dispute, your next steps may be mediation, litigation, or in an extreme situation, seeking dissolution of the business.
Mediation is for business partners who intend to continue doing business together; through mediation, they can resolve communication issues and disagreements about how their company and relationship should function with the use of a neutral third-party mediator. An impartial mediator may help business partners communicate effectively and make decisions, putting them on the road to better collaboration by memorializing a settlement in a mutually negotiated contract.
Through litigation, one partner may make a legal claim against another through a lawsuit or other filing. Financial compensation for the harmed parties may be granted as a consequence of filing a legal claim against business partners who have breached their duties to their fellow partners and/or the company.
To sue a partner for breach of contract or to legally proceed against a fellow partner in a partnership dispute, it is important to gather the company’s financial documents and records. Examples would include monthly bank statements, tax returns, and any profit and loss statements for the business. You should also try and gather any organizational documents that may exist (e.g., partnership agreements, any paperwork filed with the Secretary of State), along with any written communications between the partners (emails, letters, text messages, etc.).
What is dissolution, and what happens if my partner and I want to dissolve our business?
In some cases, it may be impossible to save a partnership, making dissolution the only viable solution remaining and the best course of action. In North Carolina, dissolution may include canceling partnership registration with the Secretary of State and dividing company assets informally or via legal action. However, having all partners agree to dissolution is oftentimes difficult, and outside legal assistance may be necessary for such a scenario.
To dissolve a partnership formally, proper forms must be filed with the North Carolina Secretary of State, and the filing fee must be paid.
General Partnerships do not normally need to file cancellations with the North Carolina Secretary of State since they are not registered. Nonetheless, general partnerships may have to cancel an assumed name with their local Register of Deeds office.
If you find yourself in a partnership dispute, call our office at (704) 814-0729 and we can help you navigate the next steps out of your situation.