How to Avoid Partnership Disputes: Lessons for Minnesota Businesses

When you are doing your research about starting a business, the "trendy" pick you'll consistently run into is a Limited Liability Company (LLC). However, starting a business isn't limited to creating LLCs. There are a variety of other corporate forms that you can consider.

One type of corporate form to consider is a partnership. Partnerships are a popular business structure in Minnesota, offering shared responsibilities, pooled resources, and combined expertise. However, without proper planning and communication, partnerships can encounter disputes that jeopardize the business's success.

Many of the challenges that you encounter in a partnership can also happen in other types of business forms. But remember, each form has its own particular rules and nuances, so make sure you're getting the right advice when choosing to start a partnership.

Step 1: Your Partnership Agreement

Your partnership agreement is the cornerstone of a successful business partnership. While Minnesota law doesn't mandate such an agreement, it's highly recommended to outline each partner's roles, responsibilities, and expectations. Some of the common provisions that you'll find in a well-drafted partnership agreement include:

• Ownership Percentages: Clearly define each partner's share in the business.

• Profit and Loss Distribution: Specify how profits and losses will be allocated.

• Decision-Making Processes: Establish procedures for making business decisions, including voting rights and authority levels.

• Dispute Resolution Mechanisms: Include clauses for mediation or arbitration to handle disagreements.

• Exit Strategies: Outline procedures for a partner's departure, retirement, or death.​

Starting with these five provisions will provide you and your partners with a roadmap for your partnership. There are other provisions to consider and address, but these provide a strong foundation for your business.

Step 2: Open and Honest Communication

Partnerships thrive when the partners are able to have open and honest conversations. For your business, you can choose the best way for you and your partners to communicate, whether it's through regular in-person meetings, conference calls, Zoom conferences, or whatever method you choose. However, you choose to do it, it's important to have a forum to discuss things like business operations, financial matters, and future plans for the business. While media may have glamorized the idea of a "silent partner," the reality is that the best partnerships are onces where all of the partners are able to speak freely, promoting trust and collaboration.

Step 3: Implement a Decision-Making Framework

Once you've got the communication piece in place, you should work together to establish a decision-making framework that includes all partners in critical business choices (you may choose to have silent partners, but make sure the framework has ways for them to participate if needed). Some features of a framework for you to consider:

• Decision Matrices: Tools that help evaluate options based on specific criteria.

• Defined Authority Levels: Clarify which decisions require unanimous consent, majority approval, or can be made independently.

• Regular Strategy Sessions: Scheduled meetings to discuss long-term goals and strategies.​

These structures can help you and your partners make informed decisions and reduce conflicts in many cases.

Step 4: Find an Attorney

This is a blog written by an attorney, so you should have been able to anticipate that this piece of advice was coming. Attorneys will help you through the formation process and when the partnership is operating to ensure that you're getting the right advice. We can assist in drafting the partnership agreement, ensuring compliance with Minnesota laws, and advising on dispute resolution options. Having legal guidance can prevent costly litigation and protect the business's interests.​

Step 5: Utilize Alternative Dispute Resolution (ADR) Methods

If there are disputes that need to be resolved, it's common to include a dispute resolution clause as part of your agreement. The two most common types are arbitration and mediation, but it's important to understand that these are different methods and operate in different ways. These methods are typically faster, less expensive, and preserve business relationships. Minnesota offers various ADR resources, including court-annexed programs and community mediation services.

But you should also understand that these methods are not perfect, they still cost money and can take time, so just deferring your disputes won't always result in the outcome you are looking for.

Step 6: Plan for the Unexpected

One of the primary purposes of any business agreement is to lay out a variety of plans for when major life events happen (think things like illness, death, divorce). To be sure that you are protecting your partnership, make sure your agreement addresses these scenarios so that the business continue to operate. Some common provisions we use for these include:

• Buy-Sell Agreements
• Insurance Policies
• Succession Plans

Preventing partnership disputes in Minnesota requires proactive planning, clear communication, and legal foresight. By establishing a comprehensive partnership agreement, fostering open dialogue, and utilizing available resources, businesses can build strong partnerships poised for long-term success.

Do I Need a Business Attorney?

If you're putting together agreements for your business and are looking for some help, let's schedule a Legal Strategy Session online or by calling my Edina, Minnesota office at (612) 294-6982 or my New York City office at (646) 847-3560. My office will be happy to find a convenient time for us to have a phone call to review the best options and next steps for you and your business.