Approach your business breakup the right way. We know that breaking up is hard to do, and when it comes to a business, it is in no way easier. Business divorces refer to the process of extracting a client from a business enterprise they no longer want to be part of. Now, there are different types of business divorces depending on how the business is formed.
Here is a list of the different types of “business divorces,” depending on the type of business we are talking about. This list includes general partnerships (dissociations and dissolutions), limited partnerships (dissociations and dissolutions), corporations (dissolutions and buyouts), and limited liability companies (dissociations, dissolutions, and buyouts). It is important to mention that all businesses are different and by no means is this legal advice for your business.
Usually, other entity types are preferred over general partnerships. Business divorces for this type of entity can consider one of the following:
- Wrongful dissociation. Unfettered right to dissociate can lead to unpredictability and instability. Consider deeming dissociations under certain circumstances as wrongful, subjecting the partner to damages.
- Valuation upon dissociation. The right to receive going concern value upon dissociation can be replaced with an alternative method, including providing for discounts to discourage dissolution or “shotgun agreements.”
The drafting concepts noted for general partnership agreements also apply to limited partnerships. Additional considerations are:
- Waiver of dissociation rights. If a client is the general partner, that client almost certainly will not want limited partners to have the right to dissociate.
- Withdrawal and buyout. There should probably be some contractual mechanism for limited partners to withdraw and be bought out. If this is not an option, an unhappy partnership is likely to pursue litigation.
Limited Liabilities Companies
Many of the drafting concepts applicable to limited partnerships are equally applicable to limited liability companies. Additional considerations are:
- Eliminating/modifying dissociation rights. The majority member should consider eliminating the judicial dissociation right because that right allows for the majority owner to lose participation rights. Instead, consider replacing with a put option for a minority member to sell the interest to the limited liability company or another member. Valuation methodology. Although you arguably cannot vary the buyout right at “fair market value,” a buy/sell agreement could utilize any valuation methodology.
If you are going through a partnership dispute, don’t go through this alone. Work with a business lawyer. Focus Law is an established and growing law firm that helps clients with various needs, including “business divorces” and partnership disputes. Call us today on (714) 415-2007, or schedule a Kick-off meeting by clicking here.