Preventing and Resolving Stakeholder Conflicts in Partnerships, LLCs, and Corporations

Dave Ramsey famously said that partnerships rarely work. The reason is that partnerships are so easy to form that often little effort is put into planning for conflicts. When you work with Surge Business Law to form a partnership, a multi-owner LLC, or a corporation, we help you plan for conflicts among stakeholders and resolve them before they start. In fact, we’ve seen enough stakeholder conflicts to know the two main causes: money and power. We’ll talk about how to prevent conflicts, pre-determine how to handle the most common conflicts, and what to do if a conflict among stakeholders arises.

Understanding the Causes of Stakeholder Conflicts

Every business is unique, but when it comes to stakeholder conflicts, the root causes often boil down to two things: money and power. Understanding these causes is the first step in preventing and managing disputes.

The Role of Money in Stakeholder Disputes

Money is the lifeblood of any business, so it’s no surprise that it’s a common source of conflict among stakeholders. Disagreements can arise over how profits are distributed, how much capital each partner contributes, or even how business expenses are managed. Without clear agreements in place, these financial issues can quickly escalate into major disputes that threaten the stability of the business.

Power Struggles and Decision-Making Issues

Power dynamics can be another significant source of tension. In any multi-owner business, there will be decisions to be made—sometimes difficult ones. Conflicts often arise when stakeholders disagree on the direction of the business or when they feel their authority is being undermined. These power struggles can be particularly problematic in 50/50 partnerships where deadlocks can occur, effectively paralyzing the business if no clear decision-making process is established.

Preventing Stakeholder Conflicts: Planning Ahead

The best way to handle stakeholder conflicts is to prevent them from happening in the first place. At Surge Business Law, we believe that thorough planning and clear communication are the keys to a successful partnership, LLC, or corporation.

Crafting a Clear Operating Agreement

An operating agreement (LLC), partnership agreement (partnership), and bylaws (Corp) are the foundation of any multi-owner business. They outline the roles and responsibilities of each stakeholder, how profits and losses will be shared, and the procedures for making important decisions. By having a detailed and clear written agreement, you can prevent many conflicts before they start. This agreement should cover everything from day-to-day operations to what happens if a partner wants to leave the business.

Establishing Profit-Sharing and Financial Protocols

Money is often at the heart of stakeholder disputes, so it’s crucial to set clear rules for how profits will be distributed and how financial decisions will be made. Will profits be split evenly, or will they be based on each partner’s contribution? What happens if the business faces a financial shortfall? How much money will be kept in reserve? By establishing these protocols early on, you can avoid misunderstandings and ensure that everyone knows where they stand.

Defining Decision-Making Processes and Authority

Who gets to make decisions, and how are those decisions made? These are critical questions that need clear answers to avoid power struggles. In a 50/50 partnership, for example, it’s important to have a plan in place for what happens if there’s a deadlock. This might include bringing in a third-party arbitrator or having a pre-determined tiebreaker system. For businesses with minority partners or non-equity partners, the decision-making structure needs to be equally clear to ensure that everyone’s voice is heard while maintaining the efficiency of the business.

Pre-Determining Solutions for Common Conflicts

Even with the best planning, conflicts can still arise. That’s why it’s important to have pre-determined solutions in place for the most common types of disputes.

Resolving Financial Disputes Before They Arise

Financial disagreements can be one of the most destructive types of conflicts in a business. To prevent these disputes from escalating, it’s wise to have contingency plans in place. For instance, you might agree in advance on how to handle situations where the business doesn’t generate enough profit to meet everyone’s expectations. This could include setting aside a reserve fund or agreeing on how expenses will be managed during lean times.

Handling Power Struggles and Deadlocks

Power struggles, especially in equal partnerships, can lead to deadlocks that stall the business. One way to prevent these deadlocks is to build flexibility into your decision-making process. This might involve setting up a voting system where a supermajority is required for certain decisions or allowing for temporary tie-breaking authority to shift between partners. At Surge Business Law, we work with our clients to draft agreements that anticipate these issues and provide clear paths for resolution.

Implementing Buyout and Exit Strategies

What happens if a partner wants to leave the business? Or if a key employee who has been granted a minority partnership decides to move on? These scenarios can be tricky to navigate without causing disruption to the business. That’s why we draft vesting agreements and buyout clauses that clarify these terms early on. These agreements outline what happens to the partner’s equity, how their share of the business will be valued, and the process for buying out their interest. By having these strategies in place from the start, you can ensure a smoother transition and protect the business from potential conflicts.

Resolving Stakeholder Conflicts When They Happen

Despite your best efforts to prevent conflicts, they can still occur. When they do, it’s important to have a plan for resolving them quickly and fairly.

Mediation and Negotiation: First Steps

When a conflict arises, the first step should be to try and resolve it through mediation or negotiation. These methods allow the stakeholders to work together to find a solution without involving the courts. Mediation, in particular, can be a valuable tool because it involves a neutral third party who can help facilitate the discussion and keep the focus on finding a mutually acceptable resolution.

Legal Options: When to Consider Litigation

Sometimes, however, mediation and negotiation aren’t enough, and litigation becomes necessary. While going to court should be a last resort, it’s important to know your legal options if a conflict can’t be resolved amicably. Litigation can be costly and time-consuming, so it’s crucial to weigh the potential benefits against the risks before pursuing this path.

The Role of a Corporate Attorney in Conflict Resolution

Having a corporate attorney on your side can make a significant difference in how a conflict is resolved. At Surge Business Law, we provide our clients with the legal guidance they need to navigate conflicts effectively, whether through mediation, negotiation, or litigation. Our goal is to protect your business’s interests and help you find the best possible resolution to any dispute.

Conclusion: Building Strong Partnerships Through Conflict Prevention

Partnerships, multi-owner LLCs, and corporations are great, but they also bring the potential for conflict. By understanding the root causes of stakeholder disputes—namely money and power—and taking proactive steps to prevent them, you can build stronger, more resilient business relationships. At Surge Business Law, we help you plan for potential conflicts before they arise, ensuring that your partnership is built on a solid foundation. And if conflicts do occur, we’re here to help you navigate them with the right tools and strategies, so your business can continue to thrive.