When you're starting a business, your plans probably include how to ensure everything goes right, profits roll in and everybody is happy. Unfortunately, at some point, you may find yourself at odds with a partner, employee, investor or another business. Even if you've taken precautions to avoid disagreements, it's not always enough. You may need to go to court or take part in alternative dispute resolution measures.

Types of Disputes and Planning for Them

Disputes aren't limited to issues with daily operations or paying bills. They can arise from things like:

  • Supply or service issues with vendors, for example subpar goods or late deliveries
  • Customers who don't pay their bills
  • Subcontractors not finishing work
  • Adding or removing partners
  • Dissolving a partnership
  • Employees or partners not fulfilling their duties
  • Neighboring businesses

These disputes can be a drain on a business' daily operation, especially if the dispute is between people who see each other every day.

Startups and other small businesses rarely have the resources to hire a lawyer or go to court. That's why it's important to plan for how you will handle disputes. You can avoid or minimize disagreements between partners by outlining in your business agreement how you will handle various situations. For example, if the business is losing money, how will expenses be paid? Or, what happens if one partner wants out of the business?

When accepting investments, even from family and friends, make sure you know how much input each investor will want into day-to-day operations. Are they happy to give you money and take their share of the profit, or do they want a more active role? Also agree on situation in which the investor might want to increase his or her role, such as if profits are falling or not growing as quickly as predicted.

You can also include arbitration or mediation clauses in contracts, indicating that both sides agree to use these alternative dispute resolution methods to settle conflicts.

All contracts should be in writing, since it's difficult to prove an oral agreement, even in states that recognize them.

Dispute Resolution

You can several low-cost options for resolving disputes.

Arbitration: Both sides submit their arguments to a neutral third party, called an arbitrator. The two sides have a hearing with the arbitrator where they present testimony and evidence, much like a trial. Afterwards, the arbitrator reviews the evidence and issues a decision. There is no process for appealing the decision.

In binding arbitration, the parties are legally bound to the decision, and if the loser fails to abide by it, the winner can have the courts enforce it. In non-binding arbitration, neither side is bound by the decision

Mediation: This form of alternative dispute resolution also involves a neutral third party. In this case, the mediator facilitates clear communication between the two sides in an attempt to help them negotiate an acceptable resolution. The mediator does not issue any decisions, but may offer various suggestions for the parties to consider. If the sides do come to an agreement, it can be made into a formal contract.

Mediation can be over in a few hours if both sides come to the table honestly intending to work out their differences.

Small Claims Court: This option is available for claims under $7500, although some states limit business'ability to use small claims court. You don’t need a lawyer, but you will need to provide documentation or witnesses to prove your case. It's a good alternative when:

  • Arbitration or mediation aren't working
  • You want to collect unpaid bills without paying a collection agency's fees, up to 50% of what you're owed
  • A contract has been broken
  • Work didn't meet your specifications

In general, the judge will make a decision right away or within a few days, rather than the months that it can take in regular court.

Disputes are unpleasant, but you do have viable options that can settle the matter and let you get back to business quickly.