What Founders Should Know Before Suing a Business Partner

Two are better than one, right? This adage follows the fact that when one falls, the other will lift them. It pretty much sums up the motivation behind business partnerships in the dynamic world of startups. 

Such businesses may be family-owned, jointly owned by spouses, or a group of professionals in the same line of work. No matter the structure, one thing all founders must prepare for is disagreements or disputes. 

Did you know that around 50% to 80% of partnerships fail within the first few years? A leading cause for this is a failure to resolve conflicts properly, whether things end up in court or not. Suing a business partner is undoubtedly a weightier choice, one that requires informed decision-making. 

This article aims to improve your understanding of partnership disputes in light of litigation. Keep reading to know important considerations before suing a business partner.

The Reality of Partnership Disputes 

Partnerships form the basic structure for two or more people to own a business together. The US Small Business Administration (SBA) shares that it may be a good choice for: 

• Companies with multiple owners 

• Professional groups (such as attorneys) 

• Groups wishing to test their business idea before forming a more formal firm 

Even the most suitable conditions do not provide immunity against disputes between business partners. They can arise due to various reasons, including profit distribution and differences in business strategy. 

Co-founder conflicts are not myths but serious issues, as evidenced by research. Studies have found that 65% of startups fail due to conflicts between partners. In many cases, matters go as far as one partner suing the other. 

Let's take the hypothetical example of a marketing technology startup in Dallas, Texas. The company was co-founded by two individuals with equal shares and an agreement on their roles. As the company grew, one partner began making decisions without consulting the other. 

Discrepancies in accounting were discovered, thereby eroding trust. Verbal disagreements turned into legal disputes. Each party ended up paying close to $150,000 in legal fees, nearly collapsing the startup. 

Unfortunately, this scenario is not unique. Business founders must be prepared to recognize red flags early on. Knowing when and how to take legal action can help save the business without incurring unnecessary expenses. 

Common Red Flags to Watch Out For 

What are some of the typical red flags that often lead to partnership disputes? Let's look at each of them in a bit more detail: 

• Unilateral decision-making - Ideally, partners should only make big business-related decisions after consulting one another. If one partner is signing contracts or changing pricing models all by themselves, this indicates a breakdown in governance. 

• Lack of transparency - Transparency in a business relationship helps build/maintain trust. It's a serious issue when one partner becomes secretive about finances, hiring, or daily business operations. 

• Breaches of fiduciary duty - All founders have a binding legal responsibility to act in the company’s best interests. If a partner ends up misusing business funds or becomes self-dealing, the breach may be worthy of legal action. 

• Abuse or misuse of authority - Authority in business is granted for service-based leadership. If a co-founder uses their position to intimidate others or manipulate outcomes, the issue will again enter the legal domain. 

Critical Steps to Consider Before Filing a Lawsuit 

If a partnership dispute appears to be heading toward a full-blown lawsuit, here are some critical steps to consider: 

Review Your Founders’ or Operating Agreement 

Every business partnership is governed by a legal agreement. Start by revisiting the founders’ or operating agreement that defines roles and responsibilities, dispute resolution procedures, etc. 

Courts often rely heavily on these documents. They will help you understand your legal foundation before the conflict escalates. 

Document Everything 

Partnership disputes seldom grow in isolation. Typically, the issue will start on a small scale and build over time. Use that period wisely by gathering a clear paper trail. In other words, start documenting everything that reflects the conflict clearly. 

This may include maintaining records of emails, agreements, communications, and so on. Such records and documents often come in handy for both in-court and out-of-court negotiations. 

Attempt Internal Resolution 

In many cases, partnership disputes are rooted in miscommunication or shifting expectations. It’s always better to err on the side of caution. Before considering a lawsuit, attempt a candid conversation or bring a neutral third party to facilitate a dialogue. 

This is a less formal and more private way of resolving a conflict. If things turn in your favor, you will have preserved business relations. 

Hire a Business Attorney 

It’s important to seek legal counsel early. A good attorney will help you understand the strength of your legal position, the risks, and the costs of the litigation. When legal action becomes unavoidable, some law firms offer contingency business litigation, meaning they only get paid if your case succeeds.  

According to Lesser, Landy, Smith & Siegel, PLLC, contingency-fee litigation is a more accessible alternative to the traditional hourly billing model. Since only favorable outcomes are charged, this option is the best for founders protecting a vulnerable business. 

How Litigation Between Business Partners Unfolds 

When legal action is imminent, it's crucial to know what you're getting yourself into. Take a look at how litigation generally unravels between business partners: 

• Filing of complaint - Litigation will start when one party files a formal complaint, typically through legal counsel. The document will outline the specific claims against the partner, including fraud, misappropriation of funds, etc.

• Discovery - Both sides will then enter the discovery phase, which is usually time-consuming. It's time to gather evidence, like financial records, emails, contracts, and even social media posts. 

• Motions and preliminary hearings - Before a trial, both parties may be able to file motions to narrow down the issues or even dismiss the case entirely. For instance, if evidence gathered during discovery is compelling, your legal team may file a motion for summary judgment. Alternatively, the court may also encourage a mediation to resolve the dispute outside the courtroom. 

• Settlement Negotiations - The goal is to have settlements before the case reaches trial, as that is faster, cheaper, and less damaging to a business's reputation. Your attorney may seek a negotiation that includes financial compensation or restructured business terms. 

• Trial - If no settlement has been made till now, the lawsuit will be tried before a judge/jury. Each side will present its evidence and arguments. If a ruling is made in your favor, you may be compensated for the losses. 

• Post-trial and business impact - With litigation comes certain consequences. If you relied on business contingency, the costs should not be high enough to ruin your company. However, be prepared for a certain degree of internal turmoil. Give it some time, and daily operations will be back on track. 

A 2025 survey on annual litigation trends has revealed that there’s been a 14% increase in companies that are “very prepared” for litigation. Nearly half of the corporate counsel anticipate a rise in lawsuits, which includes those against co-founders. 

This underscores the importance of staying ready for the worst. However, proceed with strategy, not emotion, because suing a business partner is a considerable decision. Approach the situation tactfully, seeking appropriate counsel, and you can navigate the legal complexities without sacrificing business integrity.