Understanding Business Divorce

Business Divorce

A business divorce involves the dissolution or severance of a business partnership; unlike a business dissolution, a business divorce signals the end of a relationship rather than the formal closure of a business. Notably in referring to “business partnership” we mean actual partnerships, as well as LLC member and corporation shareholder disputes.

Getting divorced can be challenging and emotionally draining, especially if the “breakup” is between you and your business partner. You both have worked hard and made personal sacrifices to ensure the business’ success, and when you first entered this partnership, you likely never thought you’d be asking, “How does a business partnership come to an end?” In this article, we will discuss why partners consider severing their relationship as well as how these relationships can end.

Common Reasons Business Partnerships Fall Apart

Several factors may have led to a dispute between you and your business partner(s) that then led to your desire to sever your business relationship. Here are eight reasons business partners break up.

  1. Unequal contributions. You likely entered into this business partnership because it was (or would be) mutually beneficial. However, if after time the roles between partners feel unbalanced, both the underworked and overworked partners may be frustrated. While the partners doing more work may feel underappreciated or resentful, the underutilized partners may feel like they’ve been cut out or rendered useless, which can also cause resentment.
  2. Not hiring help. While your partnership is likely mutually beneficial, there may still be tasks or roles that are outside your expertise. For instance, you nor your other partners may excel at accounting or payroll tasks. While you or your other partner may be trying to help by taking on these tasks, you risk ruining your partnership. The party who takes on the task might feel overwhelmed or underappreciated, and the partner who doesn’t take on the task may feel frustrated if the tasks are not done swiftly or correctly. If no one has experience or the needed skills to handle certain tasks, you should consider hiring additional help.
  3. Differing visions. While you may have previously agreed on the business’s goals and values, you may now have different visions or hopes for the business that do not align. If partners are not on the same page concerning the direction of their company, either party may walk away or feel like they need to take steps to end their business relationship.
  4. Finances. Money-related conflicts (i.e. differing opinions concerning payroll, budgets, etc.) can end business relationships and affect your business. If there are disagreements concerning how the company’s money is handled or other financial issues, partners may often butt heads. In some cases, partners may seek to remove themselves or their partners as a solution.
  5. Loss of interest. If a business partner stops caring or actively participating in the business, the other partner(s) may take steps to remove the disinterested partner from the business.
  6. Irresponsible behavior. How partners behave can affect your business’s reputation and relationships. If a partner is making bad business decisions, behaving inappropriately with clients or staff, or using company resources irresponsibly, the other partner(s) may decide to sever the business relationship if other intervention methods were unsuccessful.
  7. Dishonesty. In any relationship, especially a business relationship, honesty is important because it affects trust. If a partner is lying by omission or about ethical issues, the relationship can suffer; the partner being lied to may worry about being “boxed out” or implicated in a serious issue like tax fraud or embezzlement.
  8. Failure to compromise. While disagreements between business partners are normal, healthy partnerships often involve compromise. If you cannot talk about your differing opinions and decide on a fair compromise, a partner may feel like their ideas are not respected, which may make them want to end the partnership.

How to Get Rid of a Bad Business Partner

If you have a Partnership or Operating Agreement, details about how to end the partnership or change the status of a partner may have been included in that agreement. However, if you do not have a shareholder agreement, you will likely have to:

  • Come to an agreement with your partner(s). Having a frank discussion with your partner(s) about the dissolution of your business relationship is an option. If you can agree on dissolving the relationship, you can discuss how you want to handle the company’s debts and liabilities as well as how your partner will take a step back. To formalize the end of your partnership, you may also need to file a dissolution of partnership form with the state.
  • Buyout your partner(s). Before starting your business or entering your partnership, you may have signed a Buy-sell Agreement, which outlines the terms for buying out other partners or business stakeholders. Even without this contract, you can work with an attorney to negotiate a buyout.
  • Litigate. If the partner you want to be removed breached their contract, has a conflict of interest, breached their fiduciary duty, or failed to do their job, you can file a lawsuit to dissolve your partnership. With a lawsuit, you will need to prove that the partner is inefficient or breached their duty; thus, you will need to collect evidence to substantiate your claims.

The Greatest Challenge

If you are a member of an LLC in New York and do not have an operating agreement, then you have a more complicated challenge. In that event, the statutory law governs the relationship, and it becomes challenging to end an LLC relationship. You should contact an experienced attorney right away.

Before trying to fire a business partner, you should consult with an experienced attorney. This article only serves as a guide and does not replace speaking with an attorney. Depending on the type of business you have (LLC, partnership, C-corporation, S-corporation, etc.), the way in which you can terminate your business relationship can vastly differ. An attorney can also review any contracts or agreements that have been drafted to protect you and your company’s interests.

Get Legal Help

The attorneys at The Glennon Law Firm, P.C. are equipped to help clients with:

  • Partnership disputes
  • LLC member disputes
  • Shareholder disputes
  • Franchise disputes
  • Breach of contract claims
  • Business litigation matters

We understand how frustrating going through a business divorce can be, and the concern over risks of losing what you have worked hard for, which is why we are dedicated to helping our clients develop a personal strategy to address their needs. Whether you need legal counsel concerning how to address a dispute between partners or need to be advised on how to move forward in the business divorce process, we are here to help.

To learn more about how we can help you and schedule a case consultation, contact our firm online or call (585) 294-0303 today.

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