Saturday, February 13, 2016

Dissolve your partnership? It takes more than a little bit of water.

We answer questions posted on AVVO. But space limitations don't always permit a full answer to interesting questions. Here's a very common issue- One business partner is "so over it" and wants to split away from the other partner (or multiple partners). How does he get out of the business relationship?

First, the original AVVO question, as it was posted by a non-lawyer, much as if the prospective client were sitting at our conference room table, over coffee:

What is the exiting/minority owner entitled to when he/she leaves the business?: A partnership where the minority owner decides to leave the business. There is no prior 'record' as to what would happen or a buy/sell agreement in the event the partnership dissolves. If the remaining majority owner of the business wants the exiting partner officially removed from the business what can the remaining partner do with the exiting (minority) partner's percentage of ownership?

Thomas’s answer: It must be valued and paid. Absent a written agreement, the code and case law will control. This could drift to a lawsuit for dissolution if folks cannot agree.

Maryland's business code fills in the gaps when business partners don't have their paperwork  in order.  For example, with so much "self help" available to entrepreneurs the documents you think control how your business operates might not adequately address your business relationships and goals. They usually are very deficient in addressing how to dissolve or wind up your business.

Consider the code your default operating agreement.  It may not provide you with a perfect solution, but when coupled with the rules of court, it does provide the mechanisms to separate you from a bad business arrangement.

We most often see broken relationships where partners have stopped effectively communicating with each other, usually after an argument over goals or finances.  It is less often, but just as ordinary that we see one partner complain that the other has committed outright fraud or theft of shared business assets-- like money or opportunities. We have all heard about former business partners competing against each other. That competition might have started even while they were in business together!

Filing a lawsuit to separate partners by dissolving the business entity is costly. It also takes time.  Where partners can no longer communicate the court may appoint a receiver to take control of business assets. There will be depositions, forced mediation in the court, written discovery, document exchanges and expert analysis performed to determine the final accounting between partners.

And there is always the risk that you may owe money, even where you started the case thinking that others would pay money to you. You might even owe a hefty tax bill to Uncle Sam.
But where there is legitimate dispute, the court provides powerful tools to claw back misappropriated assets, and to bar others from profiting from use of partnership opportunities.
After working through contentious partner disputes for almost three decades, I assure it is always less expensive to to tighten up your basic business documents before the first argument, when everyone is still in like with each other. When disputes arise, as they most certainly will, talk, negotiate and settle without court intervention. And if that doesn't work, be ready to take time from your busy schedule to sit for deposition, where only the coffee is free.
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