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Most businesses are not solely founded and owned. When you start a new business, you will often collaborate with others and have several co-founders, directors, or shareholders. If you disagree with any of these parties, managing the relationship and business moving forward can be difficult. Therefore, it is essential to understand how to resolve these issues, the legal implications of these disputes, and how things can go wrong. This article will discuss some useful strategies to sort these issues out during a co-founder dispute.

What Is Our Relationship?

When you set-up a business, there are several different structures you can choose from. Some common structures include:

Structure

Overview

Company

If you have set up a company, you must consider whether you and your co-founder are both directors or shareholders. Directors generally have more control than shareholders and have specific duties to the company. If you are only a company shareholder, you will have some decision-making power. However, this is more restricted than a director. 

The essential documents for this business structure are the shareholders agreement and company constitution.

Partnership

Partnerships are a legal entity that includes two or more people. They often have their own ABN. Partners will have joint liability for the debts and obligations of the partnership.

The critical document for this business structure is the partnership agreement. 

Your business structure will impact the types of strategies you can use to resolve a dispute.

What Resolutions Are Available?

There are several ways to resolve the dispute and part ways with or without continuing the business. The solution that best suits you will depend on whether you or the other party have broken the law and what you can agree on. You should try to preserve your co-founder relationships where you can, even if it means needing to have a difficult conversation. Some possible outcomes include:

  • sale of the business or business assets; or
  • dissolution of the partnership or winding up the company.

Try to Negotiate

The first step in any dispute should be to try and work together with your co-founder to resolve the issue. While you may not agree on everything, escalating the dispute and getting a lawyer involved will be costly and time-consuming.

Furthermore, when lawyers get involved, they will often encourage and work with you to find a middle ground between the two parties based on your legal rights. Therefore, if you can get to this point sooner, it will save a significant amount of hassle!

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Sale of Business or Business Assets

Offering to buy out your co-founder’s shares or selling your assets in the business can be a great way to part ways amicably due to a co-founder conflict. For example, you could sell the business as a whole or sell specific assets like shares or other intellectual property.

To agree on a value for your sale or purchase, you should refer to your shareholders agreement or partnership deed to determine whether there are any specific valuation requirements. Alternatively, both parties could appoint independent valuers to consider the business and provide their professional input on the value. 

If your co-founder has done the wrong thing, whether this is a breach of their director’s duties or your partnership agreement, you can potentially use this to leverage a better purchase or sale price.

You should formalise any agreement you come to in a written sale of business agreement or asset sale agreement.

Dissolution of a Partnership

You should note that if you have used a partnership structure, your focus should be on selling or purchasing the business assets. Given that the partnership is a legal entity, you will need to formally dissolve and deregister it to ensure that parties do not continue to incur shared debts and liabilities. Furthermore, you will need to transfer or pay out ownership of assets and liabilities.

If you do not have a formal partnership agreement, you can rely on the state partnership legislation to dissolve the partnership.

Winding Up Your Company

If both co-owners no longer want to operate the business or have sold the business’s main assets, you may want to dissolve the company. You will need to pay out any remaining debts and then voluntarily deregister with ASIC.

What if We Cannot Come to an Agreement?

If you and your co-founder cannot agree on a resolution, you may need to go to court. What you can achieve with litigation will depend on your specific situation and what remedies are available to you. It is important to note that court proceedings can be costly and time-consuming.

Key Takeaways

Resolving co-founder disputes can be difficult, and you will need to consider your business structure to choose a way forward. Most importantly, the most cost-effective way to resolve these issues is to negotiate and come to an agreement with your business partner. Although getting a lawyer involved can help with negotiations, you will still need to come to an agreement or go to court.

If you need help with resolving a co-founder dispute, our experienced dispute resolution lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

What resolutions are available for a co-founder dispute?

You can discuss selling the business or business assets, or dissolving the partnership or wind up the company. Both methods allow you to part ways with the business and end your involvement with your co-founder.

What do I do if we cannot come to an agreement?

You may need to go to court and litigate. However, this can be expensive and time-consuming.

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