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Dissolving a Business Partnership

What do you do when you and your business partners just cannot make it work anymore? A business is very much about relationships, but unlike a marriage where there is only one way to legally dissolve the relationship, when it comes to a business in which you might have partners, members, co-owners or shareholders, there are several potential solutions for parting ways. There are many names for the time when partners separate from one another in business; whether you call it termination, dissolution, winding up, or even a “business divorce.” These include both mutual agreement and involuntary dissolutions, depending on the circumstances. 

There are multiple types of business entities, as many owners will know. The first thing you will need to know is what kind of business you have. Hayes, Berry, White & Vanzant’s blog has a very helpful article on business entities HERE.

Buy-out Process: 

If your business has partners or co-owners, a possible solution to explore is negotiating a buy-out of interests within the company. Here, one party’s interest in the business is exchanged for monetary compensation, transferring ownership to another party in the business. Proper legal documentation and updates with the Texas Secretary of State are necessary for this process. Any alteration in ownership mandates adherence to the appropriate legal procedures and documentation. Failure to do so may render the transfer ineffective or jeopardize the liability protections afforded to individual owners by various business entities.

Management Issues:

If management of the business is the only issue in dispute, then a change in management according to the entity’s provisions may have the desired effect. This may include electing new officers, transferring the majority of the voting interest, or amending the company agreement. Tex. Bus. Orgs. Code Ann. § 101.052.

What happens if you cannot agree?

Typically, if the involved parties fail to reach an agreement, resorting to a lawsuit may become necessary. Litigation regarding business management can take many forms, and the Court can be petitioned to step in and resolve or rule on many kinds of disputes. 

However, when the only recourse is the forced removal of an owner, the parties encounter significant challenges. Further, there is usually no straightforward procedure for ousting an owner against their wishes; legal action is inevitable. Additionally, Court rulings rarely impact ownership and management unless under exceptional circumstances, making this avenue an improbable resolution. See Tex. Bus. Orgs. Code Ann. § 11.314. 

Rather, more likely is a forced judicial dissolution of the business entity. An interested party can file a lawsuit to force the dissolution of the business, and have the Court order the business to “wind up” by clearing its books, selling its assets, if any, and dividing the balance amongst the owners; at that point, the owners could take what they have left and start up their own, independent business. However, the Court weighs certain factors in determining whether winding up and/or the termination of a partnership is appropriate, such as the:

  1. Frustration of the economic purpose of the entity
  2. Actions of another owner impeding upon the business
  3. Governing documents regarding the entity’s business 

Preventing these issues:

Luckily, almost all of these problems can be avoided by having carefully, and professionally crafted legal formation documents and a well-made company operating agreement in the first place. Free or low-cost forms on the internet for forming your own business can seem like a bargain, but those savings are woefully balanced against the amount of trouble you can buy yourself in the long run by not having your business formed and your company agreements drafted by a competent attorney. An ounce of prevention is worth a pound of cure.

If your business is facing these kinds of difficulties, or if you’re looking to start a business and want to avoid many of these headaches in the future, call Hayes, Berry, White & Vanzant, LLP and our experienced attorneys can help guide you through this process and provide you with the full service you and your business needs.

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