What Can You Do When Your Partner Is Not Performing?
Ragain & Clark November 30, 2022
Every business relationship can go through difficult phases, but some can reach a point where more drastic action needs to be taken. This is often the case when a partner is no longer producing in a way that justifies their compensation. Understandably, taking action can be incredibly hard, especially when your relationship is also personal. The first place to start, however, is understanding your options. If you have found yourself in a dysfunctional business relationship, an experienced business dispute lawyer can provide the guidance you need.
Consider Who Owns What
This is probably something that is already in the back of your mind, but you need to factor in the ownership interests involved. In addition to who has the majority ownership interest, you also need to consider the following:
- Who owns the important assets of the business such as office or warehouse space?
- Who holds the relationship with important customers, clients, or vendors?
- Who has the expertise needed for the business to thrive?
- Is the business dependent upon one particular partner’s reputation?
The answer to those questions will shape how you proceed, along with whether the non-performing partner holds the majority ownership interest.
Review Your Foundational Documents
Whether you are a partnership, an LLC, or a corporation, the foundational documents will probably lay out your options in the event that the partners can no longer get along. These provisions may be found in your operating agreement, partnership agreement, article of incorporation, or other document depending on the nature of your entity.
Generally speaking, your options are limited to what is contained in the documents that created your business entity or what may be otherwise available by law. As a result, you may not be able to force a difficult business partner to do “the right thing” if you have no legal authority to do so.
Talk to the Other Owners
If there are other owners besides yourself and the non-performing partner, you should discuss your concerns with your other partners. That way, you can gauge whether your co-owners share your concerns and desire to reach some more sustainable resolution. At a minimum, you do not want them to be blindsided when you try to force a resolution – they could take the non-performing partner’s side and you will find yourself in the minority position.
Is a Buyout an Option?
Hopefully, your business’s foundational documents contain a buyout provision for precisely this situation. This would allow you to buy out the non-performing partner’s ownership interest and force them out of the business. While this option would require some cost to the business, it does provide a long-term solution to the problem.
Of course, buying out the non-performing partner’s shares would require them to be a minority owner. If you find yourself in the position of being the minority owner, you may want to consider asking the business to buy out your ownership interest if they do not want to deal with the non-performing partner.
Consider Reducing Their Compensation
If a buyout is not possible, one option that is arguably less adversarial is to reduce the non-performing partner’s compensation. That said, they may still be entitled to a share of the profits as dictated by the foundational documents. Your only option may be to reduce or eliminate their salary.
If this sounds too adversarial, you may want to consider revising your compensation structure as a whole – one that ties compensation to sales, hours billed, or some other tangible metric.
Dissolving the Business
The most drastic action is to dissolve the business and pay each owner whatever share they are entitled to. Dissolution will likely require, at a minimum, majority approval. It’s very likely that it will require a super-majority or even unanimous approval.
Litigation is a Possibility
Even if the partner agrees to a buyout or some other “amicable” resolution, the situation can still result in litigation. Disputes can arise over what is required by your partnership agreement or valuation of the partner’s ownership interest. Dissolution can also result in numerous disputes that can quickly lead to litigation. For these reasons, we recommend that you engage a business dispute lawyer as early in the process as practicable to minimize the potential risk of litigation.
Contact the Business Dispute Lawyers at Ragain & Clark
If you have a partner who isn’t performing, we can help you find a way forward. To discuss your issue and your options, contact us today at 307-388-6400 (Worland) or 406-651-8888 (Billings) to schedule a consultation with one of our Wyoming and Montana business dispute lawyers.