Virginia Business Litigation Attorney: When business partners can’t agree, what happens with the business?
Note: In this article, I use the term “partner” and “partnership agreement” loosely. The rules governing each are slightly different. For example, dissolution of a general partnership will be slightly different than for a stock corporation.
Business partnerships can go wrong for many reasons. When you are in business with one or more partners, there are important steps you should take not only to make the partnership successful, but also to determine what will happen if it is not successful.
Partners may find that they just don’t get along, plain and simple, and the partnership may need to be dissolved or restructured and both parties go their separate ways. In this scenario, how the business was initially structured will dictate how easy, or difficult and costly, dissolving the partnership will be. Options and responsibilities for dissolving a business depend on whether the business is a general partnership, LLC, a non-stock corporation or a stock corporation. Unfortunately, many business partners do not draw up the appropriate governing documents and agreements and realize their mistake when they are in a dispute with their partners. Many times I am asked to enter disputes where it is unclear who owns what percent of the business. Please remember that it is never too late to adopt governing documents such as an Operating Agreement (LLC) or Bylaws (Corporation).
Once again, I am using the term “partnership agreement” rather loosely in this brief article. The type (and name) of agreement is specific to your business structure. While having governing documents is always suggested, it is not mandatory under Virginia law. For example, a stock corporation in Virginia must have bylaws; however, a limited liability company is not required by law to have an operating agreement.
In the event that your business does not have any formal documents, Virginia law will control what happens in a dispute or dissolution.
A partnership agreement will reduce the stress and cost of operating a business. If one partner’s actions are affecting the business financially, the entire business will suffer, whether through relations with clients and vendors, affecting credit, or in other areas. Even with a partnership agreement, there is a shared liability for the actions of the business and its debts.
If you don’t want to dissolve the business entirely, the percentage of ownership between partners can be changed. Instead of a 50-50 partnership, perhaps one partner wants to lessen their share of the responsibility or involvement. Another choice is for one partner to buy the other partner’s share or sell their share to the partner. An additional option would be for one partner (and I am using that term loosely) to take a more passive approach. Perhaps one of the owners would be better behind the scenes. Many a business dispute arises because of widely differing opinions on how to manage day-to-day operations of the business.
To shut down the business altogether, determine the business’s worth and whether all partners have met their expected responsibilities, what will happen with current clients and vendors, and how to address outstanding contracts and loans, etc.
Please pay close attention to this last point. No matter where you are in the dissolution process, you need to be careful to preserve the business. I have been involved in many a business dispute in which one partner decides to start taking steps to harm the company. This will almost certainly lead to litigation. If you believe your partner is taking steps to harm the company, you should contact an attorney immediately. In many (but not all) situations, owners of a business owe a fiduciary duty to the company. This means that you do not have the right to start calling clients and encouraging them to start sending business to your new separate venture. You also have a duty to preserve company assets.
Consulting a business attorney to guide you through the closure process and draft a dissolution agreement can help protect you from any future claims that may be brought against you when you close your business. Of course, it may already be too late. In that event, you should discuss your needs regarding litigation. Give my office a call if you have questions about how I may assist you.
Ryan C. Young | Virginia Business Law Attorney