What to Do If Only One Partner Wants to Quit the Business?

Business partnerships can work exceptionally well when both people are equally vested in the company’s future. Over time, however, their vesting can fade for one reason or another. What happens if one partner wants to sell or exit, and the other doesn’t? It’s crucial to take proactive steps to limit legal disputes if such a situation arises in your company. 

Rely On the Governing Documents

Going into business together is, on some level, much like getting married. There are shared financial obligations and management responsibilities. It’s common for partners to imagine that their business partnership will never end. Unfortunately, even if a company is highly successful, life can get in the way, and sometimes a partner must leave. When that happens, all the requirements of the partnership’s governing documents should be honored except in specific circumstances.  

Whether it’s an uncontested departure, such as a divorce, move, retirement, change in career plans, a death in the family, or a contested one because of conflicting management style or opinion or hostility, the partners should always fall back on the governing documents for what happens next. 

Even in a contested departure, the appropriate regulatory documents must still be followed unless one or multiple parties feel it creates an inequitable relationship. If that happens, the departing partner or the remainder of the partnership may decide to file a lawsuit. 

Business Structures and Departures

Notably, “partner” is a term that has significant and complex legal meanings when used for business owners working together. When we use the term “partners,” attorneys are most often referring to owners of a partnership who are taxed a specific way. However, people often refer to themselves as partners in small businesses even if they are actually shareholders in a corporation or members of an LLC, taxed differently than partners. These distinctions are incredibly important for tax impact and legal structure for the exit of an owner. Different requirements apply depending on how the owners structure their business since there are different kinds of formation documents. corporation, or members in an LLC. For instance: 

• There are multiple types of partnership types from general partnerships, limited partnerships, limited liability partnerships, and even limited liability limited partnerships – each of which is governed by the partnership agreement.
• Limited Liability Corporations (LLC) are governed by the Articles of Organization and an Operating Agreement.
• C-Corps and S-Corps are governed by Articles of Incorporation, Bylaws, and other voluntary agreements such as Shareholder Agreements.

Partnership Complexities

Specifically, in the context of a partnership for tax purposes (whether a partnership entity or an LLC taxed as a partnership), there are certain complexities built into the law because of the practice of business partners over many years. For example, partners are generally categorized as General or Limited Partners. Furthermore, a partnership could be made up of only General Partners, General Partners, and Limited Partners, or possibly even just Limited Partners (e.g. LLCs Members who give all the day-to-day management to a third-party Manager).  

• The legal statutes provide some defaults but are not intuitive for most people. It is extremely important that partners working together put an agreement in place that is in writing to address their relationship, and how they can exit the business, pass it along to family or key employees, or even remove a partner who has stopped contributing or is making trouble. Buy-Sell Agreements

Within a business relationship, the document or terms that address how to keep ownership controlled and directed for succession is the Buy-Sell Agreement. This can be in a Shareholder Agreement, in the Operating Agreement, in a Partnership Agreement, or even on its own.  In short, the Buy-Sell provides the partners a way to restrict transfers, control when a partner can leave and how they can leave, and control the economic and tax issues by managing how and when someone can purchase the ownership rights of the leaving partner so the business can continue successfully. 

How a Business Attorney Can Help

By hiring a business attorney to draft solid, reliable partnership agreements in advance, you can reduce the chances that litigation will be necessary if one partner leaves. An experienced business attorney can also help navigate the implementation of these agreements if one partner decides to leave. Contact the attorneys at Hackstaff Snow Atkinson & Griess to ensure you have the right partnership agreement today.