Legally, a divorce is a process that ends a marriage between two spouses. After a divorce becomes final, the spouses are free to remarry. A divorce can also happen in a business, whether a partnership, a limited liability company (LLC) or some other legal form.
A business divorce describes the dissolution of a partnership, an LLC, or another form of business. It may result from a disagreement among business partners or the members who own a company. Business divorce is sometimes referred to as a “company divorce,” “corporate severance,” “corporate divorce,” or “business breakup.”
People can end partnerships and other types of businesses for any number of reasons, such as the following:
- Soured personal relationships among partners, shareholders, or members;
- Partners or members do not agree on the future direction of the business;
- One partner or member has lost interest and is not doing their share for the business;
- The original business model was not suitable for its purpose;
- The business may not have experienced success, and financial strains have resulted;
- Poor business decisions have been made;
- The business may be unable to access needed credit;
- The business may be the victim of unfair competition on the part of a partner or other actions taken in bad faith.
Reportedly, a business divorce can be as acrimonious as the marital kind. Experts advise a person considering the dissolution of a business to give it careful thought. All parties want to remember that they have invested much time, personal ability, know-how, and possibly money into their business. Because of what partners or members have invested, they may act out emotion, ego, anger, and ill will. Such conduct can cause serious issues to develop.
What Are the Most Common Claims in Business Divorces?
One thing that experts recommend for a person facing a business divorce is to reflect on what their own long-term goal is for the business. Some of the options a person might consider are as follows:
- Total Division of the Business: The business’s assets can be distributed among the owners, and the business is dissolved. Each owner then proceeds on their own or in partnership with new partners;
- Realignment: In this version, the owners can determine that the problem is the current management model. It is not working for the business, but it can be fixed by taking certain corrective actions, e.g., having owners adjust their duties and responsibilities or hiring professional third-party management. This may require revision and redrafting of the partnership or operating agreement to reflect the changed circumstances;
- Buyout: Another option is a buyout. An owner who wants to keep the business going in more or less the same form as it operates when interest in dissolution may prefer to buy out other partners or members, and the business survives as a going concern.
Other options are also possible. This list is not complete. But it contains the three most common goals people might identify in a business divorce. The important point is to have a clear goal on which a person can focus their efforts and attention.
The most common types of legal claims regarding business breakups involve allegations of manager liability in limited liability companies, director liability, or officer liability. The legal claims also involve such issues as the following:
Must Business Divorces Always End in Lawsuits?
The dissolution of a business does not have to end in lawsuits. In fact, the parties should work vigorously to avoid them. First, if the partners or members consulted a lawyer when they started their business, they may have a partnership agreement or operating agreement that provides clear guidance on how to proceed in the event of a dissolution.
For example, if one or more existing partners or members wish to continue the business and buy out another partner or member who wants to exit, their partnership agreement may set out conditions and procedures for achieving that goal.
If agreements of this type are not in place, then business partners would be well advised to negotiate a buyout. Or they may wish to negotiate a dissolution of their business. Business negotiation is a process in which two or more parties work to settle their issues and disputes out of court. The negotiations usually involve the parties agreeing on a mutual exchange of actions they want to bring an end to a business relationship.
Governing documents may provide other methods an owner can use to exit a business. An owner who wants to disassociate from a business might be able to use an election, i.e., a “put” option. Or an owner who wants to remove another owner might use a “call” option.
One owner can be forced to buy another owner’s interest in a business through a put. One owner can force another to sell their interest through a call. Puts and calls are usually contained in shareholder agreements or buy-sell agreements. Sometimes, an employment agreement between an owner as an employee and the business may have a mechanism for removing the owner as an employee and an owner.
Of course, negotiations would have to focus on wrapping up the business’s operations. Any debts and liabilities must be paid or assumed by one or more parties. Any remaining business obligations would have to be met.
If the business is going to dissolve, there may be space issues that must be handled, e.g., cancellation of a lease, disposal of office furniture, tools and equipment, supplies, and the like. If the business has employees, then terminating their employment contracts would have to be managed.
If a business is to be truly dissolved, then there may be legal formalities that have to be taken care of, notifying the secretary of state of the state in which the business operates of the fact that it is ceasing operations.
Assets have to be distributed if there are any after all debts and obligations are paid. And, of course, final arrangements must be made for the payment of any outstanding tax liabilities.
What Happens If I Do Not Have a Formal Written Partnership Agreement with My Business Partner?
A person in this situation should consult with a business lawyer. If there is not a well-drafted partnership or another operating agreement to guide the process of dissolution or the exit of an owner, then the parties have to negotiate a resolution of all the issues. A lawyer is informed about state and federal law and the requirements of any applicable law.
Should I Talk with a Lawyer about a Business Divorce?
The dissolution of a business can seriously affect a person’s economic interests. Contacting a business lawyer regarding a breakup is important to understand your legal rights and responsibilities. Your business lawyer can review any partnership or operating agreement and advise you on what it requires.
If such an agreement is unavailable or does not give clear guidance, your lawyer can help you negotiate an agreement on all of the issues. A business divorce can be messy, and it can get complicated. An experienced business lawyer can help you resolve the many issues that are likely to arise and help you achieve your goals for your business life.
