According to Vincent Tong, founder and managing attorney of TONG LAW, an Oakland-based business law firm, certain partnership disputes are more likely than others to lead to a “business divorce” – the legal dissolution of the partnership and division of assets.
“In my practice, I see the same issues cropping up again and again in partnership breakups,” said Tong. “These disputes are not only the most common but also the most potentially destructive to the business and the partners’ relationships.”
Tong identifies five partnership disputes that frequently lead to business litigation:
- Breach of Fiduciary Duty
Partners owe each other and the business a fiduciary duty of loyalty and care. When a partner breaches this duty – such as by self-dealing, misappropriating funds, or disclosing confidential information – it can shatter the trust that the partnership is built on.
“Fiduciary breaches strike at the heart of the partnership,” said Tong. “If partners can’t trust each other to act in the business’s best interests, the relationship is often irreparably damaged.”
Tong notes that a breach of fiduciary duty is not only grounds for dissolution but can also expose the breaching partner to significant damages and even criminal liability in cases of fraud or embezzlement.
- Fundamental Disagreements Over Business Direction
Partnerships can also fracture when partners have irreconcilable differences over the company’s direction. Whether it’s a dispute over growth strategy, target markets, or management philosophy, a fundamental misalignment of business vision can create an impasse.
“If partners are constantly deadlocked over major decisions, it can paralyze the business,” warned Tong. “Sometimes, the only way to break the stalemate is to part ways.”
Tong advises partners to discuss their business goals and philosophies upfront and include deadlock-breaking mechanisms in their partnership agreement, such as a buy-sell clause or mediation provision.
- Unequal Commitment or Effort
Partnerships thrive when all partners are equally invested in the business’s success. If one partner consistently shirks their responsibilities, fails to meet performance targets, or refuses to invest additional capital, it can breed resentment and conflict.
“Partnerships are like a three-legged race – you have to move in lockstep,” said Tong. “If one partner isn’t pulling their weight, it can hold the whole business back and frustrate the other partners to the point of dissolution.”
Tong recommends setting clear performance expectations in the partnership agreement and holding regular partner reviews to address any imbalances before they fester.
- Personal Conflict or Misconduct
Sometimes, partnership disputes are less about the business and more about the partners’ personal relationship. When partners’ personal lives bleed into the business – such as through a romantic entanglement, substance abuse issues, or interpersonal conflict – it can poison the partnership.
“Partnerships are business marriages, and just like in a marriage, personal issues can be fatal,” noted Tong. “If partners can’t compartmentalize their personal conflicts or one partner’s misconduct becomes a liability, dissolution may be the only option.”
Tong advises partners to keep their personal and professional lives separate and to have a frank discussion about their expectations for personal conduct.
- Intellectual Property Disputes
In partnerships that rely heavily on intellectual property (IP), disputes over IP ownership and control can be a major flashpoint. If partners disagree over who owns the company’s patents, trademarks, or trade secrets, or one partner is accused of misappropriating IP, it can lead to costly litigation and the dissolution of the partnership.
“IP is often a partnership’s crown jewel, so fights over it can get ugly fast,” said Tong. “It’s crucial to have clear IP assignment and ownership provisions in the partnership agreement to avoid these disputes.”
Tong also stresses the importance of maintaining meticulous records of IP development and registration to establish a clear chain of title.
While partnership disputes are sometimes inevitable, Tong emphasizes that many can be prevented or mitigated through proactive legal planning.
“The best way to avoid a business divorce is to have a prenup – in the form of a robust partnership agreement,” he advised. “By anticipating potential areas of conflict and agreeing on mechanisms to resolve them on the front end, partners can save themselves a lot of heartache and legal fees at the back end, should issues arise.”
If you’re facing a partnership dispute or want to bulletproof your business partnership, you can book a consultation with Vincent Tong and his team at https://tong-law.com/.
About TONG LAW – Employment and Business Attorney
TONG LAW is a law firm in Oakland and Sacramento, California, dedicated to serving both employees and businesses. The firm represents employees in employment law matters involving workplace discrimination, harassment, wrongful termination, and wage and hour violations.
Additionally, TONG LAW offers comprehensive business law services, assisting companies with contract negotiations, corporate governance, and compliance matters. Led by Vincent Tong, TONG LAW is committed to providing personalized, high-quality legal representation to individuals and businesses throughout Northern California.
Contact Information
TONG LAW, California Employment Law Attorneys
1999 Harrison St 18th floor
Oakland, CA 94612
836 57th St, Suite #610,
Sacramento, CA 95819
