The US Small Business Administration reports that small businesses make up 99.5% of all Virginia businesses and employ 1.6 million people, or more than 46.6% of the state’s workforce.
Business relationships have their ups and downs, and the average relationship among business partners has a life span of less than five years. As a small business evolves, partners will likely encounter unexpected situations and decisions that separate them even though they once shared very similar visions and goals for the business. To reduce the risk of confusion and controversy in business relationships, it will be helpful to address some common sources of trouble, including:
● Compensation: Business partners may experience conflict if their compensation levels deviate significantly reflect from their relative economic investments or time commitment (also referred to as “sweat equity”) in the business.
● Authority and Responsibility: When the power balance among business partners is too lopsided, the risk of conflict seems to increase. In some situation, a periodic review and redefinition of each owner’s role can address the situation, but if one party unexpectedly becomes unwilling to compromise, alternative dispute resolution or even litigation may be necessary. Most of the time, litigation is a horribly expensive, distracting, and inefficient way of resolving disputes.
● Unethical Conduct: If one partner is granted authority to make decisions on behalf of others, he or she expected to act with the utmost integrity and in the best interests of the company and its owners. Falling short of that standard may constitute a breach of contract or even a breach of fiduciary duty (the highest level of duty imposed under the law), which can threaten the future of the parties’ relationship, not to mention the survival of the business.
● The Proverbial Differences of Opinion: Conflicts between business partners may arise when different goals for the company’s direction emerge. Successfully addressing those issues is crucial to maintaining a strong business relationship. In some cases it may simply make sense to dissolve the company, while in other situations a candid discussion (or series of discussions) between the partners can be effective. Even in situations where a problem arises that is not specifically addressed in the company’s Operating Agreement or Shareholder Agreement, parties can often navigate the issues through effective communication and rational compromise.
Eric Perkins has been helping small business owners across Virginia address their business transaction, contract, and compliance needs for over 25 years. Contact us through www.ericperkinslaw.com or 804.205.5162 to discuss your small business and nonprofit questions.