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Leaving a Partnership — How To Do It Right

So, you’ve decided (or are considering) to leave the company you’ve either helped to form, purchased an interest in, or otherwise joined for one reason or another. There are many reasons why you may want or need to leave the company:

  • Retirement
  • Change of life circumstances, because of a family member death, change of careers, or other significant event
  • Due to a disability or incapacitation
  • Differences of opinion or management styles
  • Loss of faith, disputes, or open hostility in one or more of the partners or co-owners

The first three green bullets above are most often associated with “uncontested departures,” while the remaining red bullets to are most often associated with “contested departures.”

Aside from the emotional issues of departing your partnership, there are legal and financial considerations that if left to their own devices, could spell financial ruin for you personally years later, whether contested or uncontested.

You will ALWAYS be better served in an uncontested departure, so if you can bite-the-bullet and do everything in your power to maintain a good relationship with your soon-to-be-former-partner or partners, you will save big.

Uncontested Departures are Best

As in divorce, an uncontested departure is significantly easier and more cost-effective than a contested departure.

Leaving a partnership takes planning and foresight. In an uncontested departure, you and your Partner(s) will collaborate and negotiate the terms for your departure, ultimately signing a “Separation Agreement” without the undue legal expense or court costs. Your Partner(s) may be unhappy about certain issues, or in you leaving, but in the end, will “do the right thing” either because they have to or because they want to.

In a contested departure, you and your Partner(s) will not communicate except through attorneys, and you will fight about the terms of departure, outstanding assets, and liabilities, and whether the Operating Agreement or Bylaws permit the type of departure you’re trying to accomplish. It may be very difficult or impossible to reach a “Separation Agreement,” and if you cannot, you may need to go to court or take the risk of departing without one. If you withdraw without a “Separation Agreement,” you run the risk of being sued, ruining your credit or worse, sometimes years after you’ve departed and thought you were in the clear.

How to Perform an Uncontested Departure

In an uncontested departure, use the following checklist to perform a proper departure that will help minimize your risks and future liability:

  • Review the current Operating Agreement, Bylaws and/or other controlling corporate documents, to ensure you follow any and all departure requirements carefully
  • Identify all assets and liabilities, and come to an agreement with your Partner(s) on the status of those assets and liabilities
  • Identify all contracts, liens, mortgages and other obligatory documents that name you personally or where you otherwise act as a personal guarantee or surety
  • Based on the above information, negotiate departure terms
  • Have yourself removed from all obligatory documents and/or where you are a personal guarantee or surety
  • Draft a Separation Agreement that documents everything, and have it executed properly by the Company and your Partner(s)
  • If there is a long-term commitment by the Company to you (i.e. to pay you money over time, or retire some form of debt), consider mechanisms to enforce those commitments, including the right to audit or security interests
  • Finally, make sure your name is removed from all formation documents, including but not limited to the Operating Agreement (for an LLC) or Bylaws / Corporate Register (if a C-Corp or S-Corp), Articles if your name is listed on the Articles, and with the IRS, if your name was used as the “Responsible Party” when your FEIN was obtained.

 

Sending a letter or notice of your departure will not relieve you of financial obligations to lenders and other third-parties.

It’s not easy to remove yourself from obligatory documents

Whether you’re listed as “a borrower” on a line-of-credit, a tenant on a commercial lease, or you’ve signed as a personal guarantee for the Company’s merchant account, these structures will seldom, if ever, allow you to leave without cancelling the account or contract outright, and requiring the Company to renegotiate a new relationship, account or contract. Simply sending a letter or notice to these Companies will NOT relieve you of your obligations, however. You must have a new contract or other document that firmly, unequivocally, releases you from any and all obligations associated with the obligatory document.

There may be strong opposition to this by your Partner(s), and oftentimes may cost the Company considerably more money in doing so.

For those obligatory documents, you cannot remove your name from, you will have to evaluate the risk associated with each one, and consider other options to the Company. Options include making the company put up some form of escrow account from which the obligation will be paid off, giving yourself some form of security interest in one or more of the Company’s assets, forcing your Partner(s) to personally indemnify you, etc. Clearly, if you’re confronted with this situation, you really do need to hire a competent business lawyer or business attorney to help you.

Make sure you identify (and address) all forms of liability before you leave

Outstanding obligatory documents you cannot be removed from represent one form of liability. Other liabilities to include in a Separation Agreement with your Partner(s) include but are not limited to potential lawsuits from third-party causes of actions (i.e. former disgruntled employees, past contract breaches, past violation of statutes or governmental regulations, and harms to customers or members of the public), outstanding tax liabilities (i.e. Unpaid NM Gross Receipts Tax), and accounts payable.

A strong Separation Agreement should be your departure goal

Law 4 Small Business can help you with your Separation Agreement. “learn more”.

The point of a Separation Agreement is to write down everything you’ve agreed to with respect to your departure. While this may not sound all that important when you’re getting along with your Partner(s), remember that things can really change during your absence. If the Company doesn’t live up to its promises, you need some form of proof and leverage to enforce compliance. If a third-party creditor or judgment (think lawsuit) comes knocking on the door, a Separation Agreement will help validate whether you’re subject to potential liability or not. Same thing if the tax man comes knocking.

Terms to negotiate with your Partner(s), that should find their way into the Separation Agreement include:

  • Final disposition of assets and liabilities
  • The price the Company is paying for your ownership, and how it’s paid (if some form of payment terms apply)
  • How the Company will remove your name over time from any obligatory documents

Furthermore, your Separation Agreement should have the following legal clauses, at a minimum:

  • Indemnities for the departing partner, to ensure the Company will hold you harmless for future lawsuits and harms
  • A security interest to cover any outstanding monies owed, debts or other obligations that cannot be removed
  • A clause covering material breach, should the Company not be able to cover its obligations
  • A right to audit the books, if you have some form of payout over time, and it’s dependent upon revenues

How to Perform a Contested Departure

If you’re unfortunate enough to find yourself in the “Contested Departure” category, the formation documents will be controlling. If you have a LLC, that will be your Articles of Organization and your Operating Agreement. If you have a C-Corp or S-Corp, that will be your Articles of Formation and your Bylaws. There may be other documents, on top of those, including but not limited to a Partnership Agreement, Restriction Agreement or Investor Rights Agreement.

If no such documents exist, then you need to look to the statute in the state where your company is formed. The statute indicate rights, duties, obligations and procedures for owners and the company itself.

You must follow these documents (and the statute), and if they are (1) not being followed, or (2) create some form of inequitable relationship, your only recourse may be litigation. Otherwise, you vary from these formation documents at your peril, and your best option would be to get your Partner(s) to sign off on your departure. This means you may need to negotiate accordingly, and that may mean negotiating with a very weak position.

Before you do, you would be best served by consulting with a strong business attorney or corporate lawyer before you go too far down this path.

Consider talking to our experienced business attorneys to learn more about your options, if you think you’re in a “Contested Departure” situation.

Law 4 Small Business, P.C. (L4SB). A little law now can save a lot later. A Slingshot company.

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37 comments

  • Very good blog post. I absolutely love this site.
    Keep it up!

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  • caroline wagner /

    I am in partnership (llc) w/ someone who did not invest any monies and no money was owed them. It was simply a way of thanking them for helping me find the location and cheering me on. The contract reflects no money was invested on their part but they will retain 20% of the profits.

    However, I have discovered some unsavory things re: this person and feel it could cause problems down the line to be involved w/ them even as a 20% partner.

    May I simply remove their name from the partnership LLC paperwork and send in the changes to the State since no money was invested and the business has yet to make any profit. At this time, no profits have been made. We are still in the beginning stages.

    OR

    Do I need a new contract written up and signed by myself and the other party reflecting the change?

    Myself and the other party both reside in Texas.

    • Hi, Caroline.

      Thank you for your question. I will assume for the sake of the question that you also have a TX LLC. Did you and your partner already sign the LLC paperwork (i.e. Operating Agreement)? If so, then you need to follow the formalities of that Operating Agreement, and that would include following whatever language pertains to “removing a member” if such language exists. If there is no language, then you will need to negotiate something with this other partner and get them to sign some form of “purchase agreement” or other document evidencing that you “bought them out” and that they are no longer a partner/owner/member in the company.

      If you and your partner have not yet signed the LLC paperwork (i.e. Operating Agreement), then you may be able to argue you’re still in negotiations although other evidence would be important, such as emails or any other evidence indicating what sort of deal you folks agreed to.

      It’s best to do something that she will agree to, and get that written down in the form of a purchase agreement or separation agreement, so that if and when the company starts doing better, you’re not defending yourself from a potential claim or cause of action regarding an ownership dispute. This will make your business very hard to sell or even borrow money on behalf of, if there is some sort of ownership dispute going on.

      I hope this helps answer your questions, if not, please feel free to contact us at any time!

      Thank you! Larry.

  • Peter Crag /

    I am in a specialized small business where I build the product (let say guitars for now) and I need to get out. The partner is making foolish financial decisions and I don’t want to go down that road. If I leave, the product ceases to exist. Do I have an obligation to stay and make that product? If he has spent the deposits on the guitars, what can I do? Meeting with a lawyer this week, but curious about more answers,.

    • Hi, Peter.

      Thank you for your question, and I’m sorry for the issues you’re dealing with.

      The immediate answer to your question is that indentured servitude and slave-labor is illegal in the United States, and therefore you can always leave. The bigger issue is what liability (if any) do you have to either the business or your partner, if you leave. The answer to that question is a bit complicated, and depends on a number of things.

      The first issue is the “formation documents,” if any exist, for the company. For example, if you are operating as a limited liability company, an “operating agreement” should exist and its terms should indicate how a member (or owner or partner) can leave the business, either by selling your ownership or disclaiming it. If there is no operating agreement, the answer to this will depend on what state your LLC is registered in.

      The second issue is whatever “formal agreement” exists between you and your partner, or you and the company. If there is an agreement in place, then you need to refer to that agreement on what the issues are, especially as they relate to your leaving the business. If there is no specific language to that, then an attorney is really going to have to look at the document to determine whether it’s really enforceable or not, as well as what language controls relating to liability if you should leave.

      The third issue relates to your partner: Is he simply “foolish,” or is he actively working against the company, potentially violating a “duty of loyalty” or “fiduciary duty” to the company? If the latter, then you may be able to do something to terminate the partnership, force him out, or force your own buyout, depending on the issues and despite the formation documents and/or formal agreement, as discussed above.

      Finally, a forth issue that comes to mind is termination. If you do leave, it’s much better to leave according to some sort of amicable settlement, even if reaching such an amicable settlement is hard. You want to have a formal document spelling out the terms of your departure, so that it’s crystal clear when you’ve left (so you don’t have further liability for any of the company’s debts, obligations or harms), and that it’s clear what assets and/or liabilities you’re taking with you upon your departure (if any).

      There may be other issues, but these four are the important once off the top of my head. It’s good you’re meeting with an attorney. I wish you the best of luck.

      Larry.

  • I want to leave a partnership and it is a contested departure. Can you please email me a sample of a typical seperation agreement. I would really appreciate it. Thank you.

    • Hi, Ani.

      I’m sorry, but we get paid to provide high-quality templates and legal services. We do have a template for sale for a reasonable price, if you’re interested. To purchase such a template, check out our Contract Templates purchase page. Note that we use these as a “starting point” for our clients, so I definitely want you to understand that our template documents are only a starting point and will probably not be suited for your needs without modification.

      Thank you for your request. Take care. Larry.

  • Can I turn my sole proprietorship into a partnership and then leave the partnership to have the business run by them

    • Hi, there.

      The short answer is “yes,” you can turn your sole proprietorship into a partnership, and then you can leave the partnership. The longer answer is you can do this, but you should be careful and you should make sure you have a “partnership agreement” that’s properly negotiated and executed to create the partnership, and then you should have a “separation agreement” that is (again) properly negotiated and executed to leave that partnership.

      Good luck to you! Larry.

  • Hello,
    My husband works for his family’s business with his mom and dad. He owns 26% of the company and has signed a few personal guarantees for the business (bank loans and equipment loans etc.) If he decides to withdraw from this LLC… do we just hope that the company keeps paying the monthly minimums due each month on the loans and equipment? Thank you for your time.

    • Hi, Tiffany.

      Thank you for your question. The first question to my mind is, “Can you husband simply withdraw from the LLC?” He may not be able to. He needs to look at the Operating Agreement to determine what rights he has, including whether he has the right to withdraw. Once you do that, you may find he has other rights, including the right to withdraw and be bought out. The Operating Agreement controls in this situation, and you need to follow it to the letter, unless the Members negotiate and agree otherwise. If there is no Operating Agreement, then you need to fall back to the statute in whatever state your LLC was formed.

      Most states will permit a member to voluntarily withdraw, although you need to be careful because if you don’t do it right, you can be on the hook for further liabilities of the LLC, even after you think you’ve withdrawn.

      The best way to handle this, is to get some sort of “separation agreement” with the remaining members. Then, you can at least get some sort of guarantee (i.e. promissory note) from the LLC and other members to help make sure those debts are paid. You can also demand other things, including making sure your debts are given the highest priority to be paid off, deadlines to refinance, etc.

      Good luck to you. Larry.

  • Hello,
    I have two partners ( 3 partners in total including myself) and one of my partner wants to leave our company.
    Each partners had 3:3:3 shares.
    All three partners agreed that the leaving partner give up all his rights and obligations.
    Now, the leaving partner wants to give his shares (33.33%) towards one partner.
    If that happens, after that partner leave our company, the share portion would be 33.33% vs. 66.67%.

    I cannot agree with that share split.
    Is it possible for leaving partner to transfer his shares even though he is giving up all his rights and obligations?

    Thank you so much for your time.

    • Hi, Charlize.

      It all depends on three things, in the following order of importance:

      • A written agreement among the owner-members;
      • The Operating Agreement; and
      • The statute in the state in which the LLC is formed.

      Most decently written operating agreements usually have a “right of first refusal” to the company provision. If yours doesn’t, you’ll need to check with statute to see if this is a permissible transfer between the members.

      If there is nothing prohibiting the transfer, then it’s probably permissible and there’s probably not a lot you’re going to be able to do about it.

      Larry.

  • Jessica M Valdes /

    I have so many questions I may need to actually speak to someone by phone. I am involved with an LLC, well it’s mine and another lady, she recently had me removed from the sunbiz paperwork, I came across this by accident. She did it when she amended our end of year months early. If she has removed me can I just walk away from the LLC and all aspects of the company? I have also not received a paycheck in more than 7 years, she just handed me cash at different times, but would write a check every week for $500 and deposit it into an account as if I signed it for payment with out my knowledge. I have so many concerns as far as IRS are concerned, will I owe them since she did the LLC taxes in my name as well, she has forged my signature on multiple items and now i’m finding out about all of this, i’m concerned for my well being. I need serious help. We created this LLC in 2006, but didn’t start of first coffee shop until 2008, I have been working this whole time this way not knowing what she was doing, she is refusing to provide me with the operating agreement and any other company documents, she is hiding money in safety deposit boxes and will not give me keys. She is expecting me to just keep working so she can keep taking money and not paying me. I am so confused and feel absolutely stupid in trusting someone else. How can I just leave?

    • Hi, Jessica.

      Thank you for reaching out to us. Obviously, you have a number of issues your dealing with, which won’t be solved (or answered) in a blog post. I do have a few things to say about all of this, however. First, we encounter this somewhat frequently, and it’s always very sad, very emotional and very expensive to resolve. It sounds like your partner wants the best of both worlds: Free labor by making you believe you’re a part owner, but then your partner doesn’t want you to have any ownership and/or is making it difficult for you to assert your ownership. Can’t have it both ways. If you’re NOT an owner, then you’re entitled to back wages, withholding taxes and more. If you ARE an owner, then you may not be entitled to back wages, but you ARE entitled access to the books, formation documents, proper tax reports and more.

      Second, when I hear the phrase “forging my signature,” then that’s an immediate red-flag that things are very wrong. I strongly encourage you to hire LOCAL COUNSEL experienced in these matters, and start figuring out what’s going on. If you’re LUCKY, and most are not, you can avoid a lawsuit after you’ve spent some time and effort putting together an accurate financial picture of the books and your liabilities. If you’re NOT LUCKY, then you will need to file a lawsuit to take advantage of the subpoena power of the court to gain access to the books, bank accounts and more. Be prepared to spend some money on a good attorney and a good forensic accountant. They are worth their weight in gold, but be prepared to fight this over the long term.

      Finally, when you ask “how can you just leave?”, that’s a tough question. You’re probably owed a substantial sum of money. You are probably on the hook for a substantial sum, as a personal guarantee, especially if your name has been being forged on documents.

      What you need to do, is hire LOCAL COUNSEL (in the same city, hopefully) to represent you and figure this out.

      Good luck to you! Larry.

  • Tom J Edwards /

    I am not a member of my company’s llc, but rather a longtime employee. After an inquisition by the company into my character, personal integrity, and business dealings I turned in my resignation. Before my 2 weeks is up I was considering having the company owner sign a hold harmless agreement to protect me from any future litigation or tax inquires as I was the company’s cfo. Do you have a template I could purchase for this, and what specific indemnities would you recommend I write in? I would be interested in submitting it to your editting service after it was drafted. I live in Missouri.

    • Hi, Tom.

      Thank you for your question. You should really consult with a local attorney in MO, who can guide you through this. A general release, waiver and indemnity agreement should be helpful, and the indemnity should include any and all expense (including attorneys fees, court costs and expert witnesses) associated with your defense, testimony and/or involvement in any cause of action related to the Company and/or your position within the Company. It wouldn’t hurt to have a statement specifically acknowledging that you were never a member of the Company.

      Good luck to you. Larry.

  • Hey Larry,

    I legally bought out 3 members in the LLC I originally formed and am the sole owner as of May 2016. In effect, I agreed to pay what was originally invested by each member. There was no income or significant loss (minimal expenses) for the year 2016. With all that said, do I still need to provide each former member a schedule K-1 for 2016 tax year? … or am I just classified as a single member LLC now and report on Sched C.? Thank you

    • Hi, Brad.

      Technically (and assuming your tax year is the calendar year), you were a multimember LLC from January 1, 2016 to May X, 2016. You are supposed to issue K-1’s for that period of time to the them members, and the remainder of the year would be disregarded. You should consult with an accountant or CPA, so they can direct you on how to accomplish this properly, as well as submit your last tax return to the IRS.

      Good luck to you. Larry.

  • Hi Larry, I have a question I am a 5% corporate partner in a friends Vodka company that I paid $350,000 cash for. I invested with my job related disability settlement so I would have something for my family future. I have not received any money in 2 1/2 years, I am not being involved or told about meetings or what in going on with company. When I asked for money or paper work to see how company sales are my friend/owner gets mad and offensive. I would like to get my 5% and leave company. But he said he can’t give me anything until if and when he wants to….Trying to find what I can do?!

    • Hi, Joe. Thank you for your question, and I’m sorry for the trouble you’re facing with this “investment.” There are a lot of issues here, but in general, if you’re a “legitimate” owner then you have the right to review books and whatever else is necessary and appropriate. What I mean by “legitimate” owner, is that I’m worried about your statement where you said “friend’s Vodka company,” which sounds like perhaps you may have given over money without all the legal documents necessary to perfect your 5% ownership. You may not actually be an owner of the company.

      If you are an owner, you have a number of rights and you can force the company to comply.

      If you are not an owner, you have a cause of action as against your friend.

      Either way, you should consult with a competent business attorney in whatever jurisdiction you’re located and have that attorney look at the totality of the facts and circumstances. From there, that attorney should be able to advise you on a number of different options, depending on how serious you want to treat the matter.

      Good luck to you, and I’m sorry I cannot give you more specific advice. Larry.

  • Yvonne Villa /

    HI Larry,

    I have a 50/50 partnership (LLC). We had named my partner the “managing partner” of the company due to her experience that she claimed to have. We’ve been in business for about 3.5 months and she has made some really bad financial decisions for the company. I do not attend regularly due to other businesses on hand. That is why we named her “managing partner” from day 1. We do have a partnership agreement, she has broken a couple clauses including not giving her initial capital investment. I have put my initial capital plus a little over 10 grand to keep the company afloat. She has not put a dime, and I have been always been given the run a round. I am trying to remove her as “managing partner” but because we have 50/50partnership and no silent partner to overrule any disagreements, she will not leave her position, she proposed to fire 3 people in order to keep her position. The problem here is not the office staff it is her not having management skills, making bad financial decisions and blaming everyone but herself on all the arising issues. My second option was to dissolve the company because I cannot contribute any more monies when she is not able to even match up any contributions I have made towards the company. How can one go forward with this?? If I can’t remove her from that position forcefully then is my second option the best thing here?

    • Hi, Yvonne.

      I’m sorry to hear of the trouble. What you can do depends greatly on the Operating Agreement that you have and what state you’re located in. The Operating Agreement will control, and you should consider withdrawal options if available. If you have no Operating Agreement, you need to look at the statute that applies for the state that the LLC was formed in. Most states’ statutes will permit unilateral withdrawal if that is your wish, which will permit you to leave and to demand payment for your fair market value of your ownership.

      You probably CANNOT unilaterally dissolve the LLC, but again, that depends on the wording of the Operating Agreement if one exists.

      Good luck to you. Larry.

      • James Mathew /

        Dear Larry,

        Greetings.

        I found your advice and responses to various questions great resource.

        I am writing this request from a country outside USA. I am one of three equal partners in a LLC where I am the managing director and signatory in one of the banks as per memorandum of association. But, one of the partners, who by local law owns 51% (on company registration) has taken control of the company. I have not been paid my monthly for almost a year. Now, like to come out of the partnership and all liabilities and also want to get the due share of the company which has a positive balance sheet.

        How can I resign from the partnership?
        I am prepared to forego part of my dues for a smooth exit and release of any liabilities.

        I understand that you got to get paid for your service. I don’t know if I can afford your service. Could you assist me with your advice?

        Kind regards,

        James

        • Hi, James.

          I’m sorry to hear about your predicament. This is — unfortunately — more common than you may think. The answer to your question depends on (1) any Operating Agreement, (2) any other agreement that may exist between you and your partners, and (3) the state where the LLC is formed.

          Your options will generally be identified in the Operating Agreement and/or any other agreement that exists between you and your partners. If there is no Operating Agreement, or there is an Operating Agreement but it doesn’t address the issues you’ve raised (i.e. right to payments and right to resign), then you need to look at the limited liability company act within the state where the LLC is formed. The statute will cover these issues.

          For example, some states will permit members to resign and seek fair-market value for their ownership upon resignation. Other states prohibit this.

          So, I’m sorry I’m not giving you an answer here. It really does depend on the above issues. My recommendation is to hire a good business attorney in the state where your LLC was formed. That attorney, within a short period of time, should be able to give you an understanding of your options and the costs.

          Good luck to you! Larry.

  • I am a 50% owner of an LLC in Texas. We do not have an operation agreement. I found out about some fraud that is going on in the company. In order to protect my certification, I asked to be bought out. They are refusing to do so and have found a investiture to buy them out, leaving me as a partner with someone I do not know. Can this person do this? Do I have any recourse.

  • Hi Larry. I’m looking thru different resources in finding a business LLC expert like you . Your replys to questions are straight to point . This question will definitely be fun , I had been in a Father son , Step Mom Step Brother business for 17yrs ,Sold business that held a LLC 5 yrs ago .In 2008 My dad becomes ill with Dementia There was issues of borrowing monies , paying for autos, personal vacations etc .with myself . When My Father was involved we had many talks , He would try and talk about these issues and nothing but arguments would come they other partners .The last two years were the worst . the other partners started buy homes like wild fire . We sold business but kept the business property and leased the buildings , Partners never paid me a penny with saying will settle when we sell property,Unaware of sale 9 months they were keeping me unaware to force a action in court to lift my name of the deed, and filed a law suit for only ,giving me a 2 day notice too sign with no contract of sale, they dissolved the LLC the day before signing of title papers that has a closing date this week ,with saying I Am the cause of the winding up the business LLC , Now i found out there was a amendment in the business sale of title papers that excluded me by vote of partnership to show me only apart of the sell but sign paper at title saying they informed me about knowing , I am 25% there 75% took my father out of his% hes in a home , My knowing the business sale $ 2,300,000.00 million was actually 3,421,000.00 ? Now 2 days get to face them in court with me being sued by them for not signing papers for property , They don’t think i would ever find out , but thank god there sueing me and made me the finding out though this process of reading threw old emails saved ?

    • Hi, Nick.

      I’ll be honest, I’m having some trouble understanding the circumstances and issues around what you’re trying to convey. It sounds, however, as though you have not hired an attorney to represent you. Otherwise, you wouldn’t have these very tight time constraints (i.e. “2 days notice”) and surprises (i.e. “$2.3 mil was actually 3.421 mil”). Wherever you’re located, you need to find a local, competent business attorney to help you here.

      If you are not adequately represented, you can find yourself facing default judgements, missing important deadlines, etc, and you may not be able to unwind the clock. You MUST HIRE A GOOD ATTORNEY ASAP, otherwise you stand to lose quite a bit of money and could have potential liability that you didn’t expect.

      I want to make it crystal clear for folks reading this: Not responding to legal actions or not hiring an attorney to represent you COULD BE IRREVERSIBLE. It’s not an excuse to say “I didn’t have a lawyer at the time.”

  • Andrea Martin /

    Hello,

    I am in an S Corp as a 50% partner. My partner is a disaster and caused a lot of problems that led to financial losses. I personally have over 100K in the business and she has 0. I would like to leave the company and start my own without her involved. The company at this point owes around 55K to various vendors. Can I leave the company and its debt to her? I will still have far more debt as I won’t get my money back that I invested but I will be able to start again without the anchor around my neck that is a bad partner. The nature of my business (event planning) is that I can go out and still use my past projects on my resume. It is important to me that my reputation stays intact despite the bad actions of my partner so I can continue to book artists and vendors for my events.

    Thanks,
    Andrea Martin

    • Hi, Andrea.

      This is a very good question, and unfortunately a difficult one to answer. The quick answer on whether you can simply leave the company and leave the debt to her, is going to depend on your Bylaws and failing that, what the statute says in the state where your company is incorporated. State law does vary in this respect. Check to see if your bylaws have any language relating to voluntary withdrawal and/or restrictions on your shares.

      My quick answer, however, really leaves out a number of important issues for you that are a factor for you. First, when you say the company has debt, does that mean the debt isn’t secured by your personal guarantee? If you did sign a personal guarantee, you’re not going to be able to walk away from that debt. If you didn’t sign a personal guarantee, then there’s hope.

      Second, are there other documents that control here? For example, did you and your partner sign a “buy/sell agreement” or “shareholders agreement” or “restriction agreement” or anything else relevant? If so, look to those documents.

      Third, is it possible to arrange for some sort of “deal” with your partner, where you sell her your ownership interest for some low value, in return for the company taking all the debt, etc? If you can get her to agree to this, it would be a preferred option but please make sure you both sign an appropriate “share purchase agreement” between the two of you.

      Forth, if you cannot get her to agree to purchase your shares and you find a way to voluntarily withdraw from being a shareholder, note that the company could claim your clients / business / past projects are company property and potentially go after you for “theft of trade secrets”. You need to tread cautiously here, and again, this favors some sort of agreement where she’s purchasing your shares and acknowledging certain clients or projects that are “yours” and can be pursued outside the company.

      Obviously, you would be best served to hire a competent business attorney in your jurisdiction. Good luck to you!

      Larry.

  • Gregory Rossi /

    Hello-
    I have been a 30% partner in a LLC business for the past 4 years, My partner and I have agreed to dissolve the business as of June 2017. As this business is run from the home of my partner, I have had no access to the books. I recently checked with our business accountant and have found that the books have not been handed over to her at all this year and I am quite alarmed by this. Furthermore I have no access other than the account number to the business account. I have been paid a portion of my distributions for past years but most of the money has been left in the business. My partner has been unresponsive to my requests and unwilling to discuss the state of the business. I do know that we have ceased all business operations as of April.
    We did not have an operating agreement, I do have K1 and partnership accounting documents which I believe is enough to prove my role in the partnership.

    At this point what I want (and have expressed) is to complete the closure of this business and obviously to recover my profit distributions due. I have a growing suspicion that my partner is up to no good and may have taken or has the ability to take the profits from the business accounts.

    Do I have a right to remove my share of the profits (30% of distribution funds owe, as i already paid personal taxes),from the account (excluding 2017 profit/loss)?
    And how do I release myself from any future involvement with this business if his intentions are to keep the business running or not.
    Thanks
    Greg R.

    • Hi, Greg.

      Thank you for your question. This is a very common problem, and the answer I’m about to give you will depend on the specific facts, and state where your LLC is domesticated.

      First, if there is no Operating Agreement, then you need to look to your state’s laws on the “default rules” that govern the formalities of the LLC. Typically, most state statutes will have rules governing issues like dissolution, naming a tax partner and dissolution partner, and withdrawal.

      Second, while there is some variance in state law regarding the issues I just identified, most states are universal in the following: All members are entitled to access the financials / books of the business, and all members have a duty of loyalty and fiduciary duty to the company.

      These rules can cut both ways for you, given what you outlined above. For instance, do you have a right to remove your share of the profits? The answer is generally “yes,” but if you’re wrong about what your share of the profits are, you run the risk of “stealing from the LLC” and thereby violating the fiduciary duty that you would otherwise claim against your partner. Also, given you’ve agreed to dissolve the LLC, there is a process that generally involves consolidating and liquidating assets, and then paying according to a legal priority (i.e. debt / lien / note / mortgage holders first, etc, etc, depending on your specific state laws). You wouldn’t want to be guilty of frustrating the efforts to properly wind-down and dissolve the LLC.

      If you suspect “foul play” and/or fraud by your partner, you can always sue him claiming a breach of the fiduciary duty of the company, fraud, embezzlement and more (depending on the specific statutes of your state — talk to a competent business lawyer in your jurisdiction). The problem with these sorts of lawsuits, is they are expensive — you usually need to hire a forensic accountant, pay them as much or more than your lawyer, and then debate about the facts (i.e. what you think were personal charges weren’t actually personal charges, or you cannot prove they were personal versus for the business, etc, etc, etc). It’s almost impossible to win legal fees in such a lawsuit. Therefore, unless the amount in controversy is a LOT (think at least $75k or more), you may end up spending more fighting about it than collecting on anything.

      How do you get released from any future involvement with the business? There are two ways: First, by a separation agreement, release or vote of the Members. This would be the easiest, most cost-effective and sure way of getting out. The other way is to check what your state’s statute says about this. In New Mexico, Members are permitted to unilaterally withdraw (or called dissociation in some states), after notice (See Section 53-19-37, Voluntary Withdrawal of Members). The same for Illinois (See 805 ILCS 180/35-45). In Texas, however, Members are forbidden from withdrawing (See Sec. 101.107). Remember, these are “default rules” which may be overridden by an Operating Agreement.

      If you cannot amicably resolve your dispute and withdraw, I would strongly encourage you to seek representation by a competent business attorney in your jurisdiction.

      Good luck to you! Larry.

  • Eustace Okine /

    hello, i want to ask if it is possible for two partners to dissolve a partnership all for the sake removing a third partner and latter reconstitute under the same name, address, facilities and client list. if yes can the third partner sue

    • Hi, Eustace.

      That’s a good question. Please see my previous answers regarding this. In particular, the question on whether two partners can dissolve without the third’s vote depends on (1) the Operating Agreement, and (2) the statute within the state of where the LLC is formed (if the Operating Agreement either doesn’t exist, or doesn’t speak to the issue).

      In general, dissolution would require either a unanimous or at least a majority vote. Again, the Operating Agreement (or statute) will indicate what is required.

      Let’s assume for the sake of the discussion, that it’s permissible to dissolve with the two partners as you’ve indicated. The bigger question for you is, can you reconstitute under the same name, address, facilities and client list and not get sued? I would say no, this is not possible. Here’s why: First, read our article about Successor Liability I think your new company would clearly be considered a successor entity, and therefore, any liabilities (even owed to previous owners) would attach to you. Second, in order to “dissolve” a LLC, you really need to “unwind” the LLC properly. This includes liquidating assets, and distributing assets as required in the Operating Agreement or statute. Therefore, how could you create a new company, using the same assets, if you’ve already liquidated the assets to unwind it properly? Basically, this would sound like a “sham dissolution,” which could be challenged.

      Sorry for the bad news. My recommendation is to hire a competent business attorney in your jurisdiction, to look at the facts and circumstances and documents, and perhaps he or she will figure out other options for you, given whatever issues you may be experiencing with your third partner.

      Good luck to you. Larry.

  • I am a 50% member of a 2 person LLC. My partner and I are no longer in agreement with how the company is being run. We have discussed a buyout but cannot agree on the amount that the other partner is requesting. What are my options at this point? This is a design company and I am the creative partner. I don’t believe there to be any value to the company as there is no cash on hand and all profits have been paid out through salary/distributions. However, we are currently under contract with 1 client on retainer for several more months. Can the company be forced to dissolve if we can’t come to an agreement? And what would be my rights be moving forward as I would like to continue in my industry? How would the current contract we are under be handled? In addition, I have discovered that my partner has formed 2 additional companies in another industry but continues to draw an equal salary from our company. Our company was started without a formal business plan and there is no exit strategy in place. Any information or advice would be appreciated.

    • Hi, Sarah.

      Thank you for your questions. Unfortunately, it would take writing a book to adequately answer you. This is really something that requires you hire a competent business attorney in your jurisdiction, to look at the facts and circumstances and documents, and perhaps he or she will figure out other options for you.

      The quick answer is you may be able to force a dissolution, but it depends on the wording of your Operating Agreement and if that’s missing, the statute of the state where your LLC is formed. It may be perfectly fine to own other businesses, provided they aren’t violating the duty of loyalty, fiduciary duty and/or any employment contracts setup.

      Even if you could force a dissolution, you’d still be required to “wind-down” the affairs of the LLC properly, and that means you still need to address that one client. Therefore, I don’t see a dissolution (assuming you can force the issue) as really solving your problem in not being able to agree with your (soon-to-be) partner.

      I don’t think you need to end your livelihood, just because this LLC did what you will do going forward. You just don’t want to “reuse” or take control of LLC assets without an effective wind-down.

      Good luck to you! Larry.

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