Business co-ownership can end for many reasons — disputes, divorce, death, liability, sickness, retirement or even criminal activity. These breakups can be complex and emotional, not unlike the dissolution of a marriage. But proactively planning for “the end,” even one that may never come, is a best practice.
Recognizing the Need for a Business Divorce Today
Most people do not enter a business intending to remain forever trapped in it. Planning for an eventual exit can help set ground rules in advance and mitigate potential issues between partners.
Signs a business could be headed for break up can include:
- Differences in Direction: It’s not uncommon for business partners to have conflicting ideas and visions, but wildly divergent trajectories of the company’s future can create irreconcilable differences.
- Work Ethic Mismatch: When one partner’s work commitment significantly diminishes without outward explanation, it can breed resentment.
- Financial Discrepancies: Financial statements revealing unexplained losses and multiple discrepancies can flag a serious problem.
- Life Event: Sometimes personal events — marriage, divorce, health issues — impact a business partner’s ability to do their job effectively or lead them to readjust their priorities.
- Legal Scenarios: Breaches of business partnerships in fiduciary duty, negligence, abandonment, fraud and intellectual property violations are signs of trouble.
Considering and Preparing for a Business Breakup
In the instances when a business partner contemplates dissolving a partnership, there are several steps to consider.
First, it’s worth assessing if any present disagreements can be resolved or negotiated and how conflicts have impacted the business’s health. This process includes looking at the financial side of the company: evaluating balance sheets, income statements and cash flow statements.
Once the owners have inventoried the state of business, it’s wise to unearth any potential solutions such as restructuring, redefining roles or investing in a third-party mediator to help provide resolution.
What Happens during Business Dissolution
If business co-owners are unable to settle their differences, the next step is a dissolution of their business entity. Since a business breakup is complex with many moving parts, each co-owner should consult an attorney specializing in business entity dissolutions as well as other professional advisors — tax and accounting specialists, financial experts, etc. During the process, the following steps occur:
- Review of Operative Agreements: Partnership agreements, bylaws, buy-sell agreements and similar type documents usually outline the process and triggers of dissolution, which may include notice periods, voting requirements, division of assets and debts and other procedural elements. If the business entity does not have such agreements in place, then dissolution of the entity will be governed principally by statutes, which may not offer as much flexibility.
- Partnership Agreement: This document outlines the rights, responsibilities and obligations of each partner. It covers profit-sharing, decision-making and dispute resolution mechanisms.
- Operating Agreement (for LLCs): Like a partnership agreement, an LLC operating agreement specifies how the business operates. It’s crucial to understand buyout provisions and dissolution clauses.
- Shareholder Agreement (for Corporations): Shareholders’ rights and restrictions are detailed here. What to look for are provisions related to dissolution, stock buybacks and exit strategies.
- Notice and Owner Vote: Vote to dissolve a business is usually required by agreement or statute, as is notice of the vote. Typically, a unanimous consent for dissolution occurs between owners. If the owners cannot agree, the entity may reach an operative impasse but still qualify for dissolution.
- Notice of Dissolution: Timely public notice of dissolution may be desirable and required. This may protect both the dissolving business and each of its owners from future liabilities. Employees, clients, suppliers and creditors must be notified and provided with reasoning and a dissolution timeline.
- Liquidation, Debt Settlement and Distributions: If an ownership agreement is in place, each owner will refer to how remaining company items — real estate, vehicles, equipment, etc. — should be sold and how residual debts should be split. Generally, company creditors get paid ahead of owner distributions, sometimes even before loan repayment to the entity’s owners. If there is no agreement, assets will be distributed in accordance with statutes.
- Button Up Last Pieces: Tying up loose ends includes adjusting tax statuses, closing business accounts, canceling permits and licenses and ending any contracts or leases connected to the partnership.
Encouraging business partners to approach the process professionally and respectfully goes a long way in securing an amicable outcome. Having the legal guidance of a seasoned professional in partnership dissolution increases the chances of a business breakup running smoothly, with the best outcomes.
Guidant Law Partner Gary Smith is a seasoned litigator, advisor, mediator and arbitrator. He focuses his practice on commercial matters, construction, real estate, cannabis and administrative law and has represented many individual and institutional clients in state and federal courts, administrative hearings and arbitration.
Did You Know: Statistics demonstrate as many as 70% of business partnerships ultimately fail. The reasons: partners neglect to set appropriate boundaries, discuss their shared long-term vision or establish exit-strategy agreements. Not having these elements in place also significantly complicates an eventual dissolution.
