What Do You Do When Your Business Partner Wants to Break Up?
A partnership consists of two or more individuals who form a business relationship. As with any relationship, partners expect to encounter situations along the way that cause disagreements and disputes. Usually those disputes are resolved and the partners move forward.
However, sometimes a partner may want to end the business relationship. Whether the partnership has two or more partners, one partner leaving the partnership can have a significant impact on the remaining partners and business.
For a two-person partnership, one partner leaving means the end of the partnership. If the partner leaving is a managing partner or the partner with the majority of the clients of the company, a partner leaving a multi-member partnership could also end the partnership.
Our Maryland business attorney assists partnerships and partners with partnership breakups. This guide to a partnership break up provides information and suggestions for how to break up with your partner professionally, and without destroying the business you have worked hard to build.
Reasons to Dissolve a Partnership
There are many reasons a partnership may dissolve. Common reasons a partnership may dissolve include, but are not limited to:
A partner retires or withdraws from the partnership
The death of a partner
A partner becomes mentally incapacitated
The partnership files a Chapter 7 bankruptcy case
The partnership conducts illegal activities
A partner buys out the interest of all other partners to transition the business into a sole proprietorship
Partners agree to dissolve the partnership
A partner obtains a court order to dissolve the partnership
Regardless of why a partnership dissolves, there are often warning signs that indicate the partnership may be headed toward a breakup.
Warning Signs That Your Partnership Might Be Headed Toward a Breakup
Partners can conduct business for years without any problems. Many partners resolve disputes by discussing the issue and negotiating a mutually agreeable resolution to the problem.
However, some warning signs can indicate a partnership is on its way to a breakup. Some common signs that a partnership might be destined to end include:
A Partner’s Goals Change
If a partner’s business or personal goals change, continuing with the partnership might not be in the partner’s best interest. It is impossible to overcome this problem because the partner has already decided that he or she needs to leave the partnership as part of the roadmap to attaining his or her goals.
Working Styles Aren’t Compatible
Individuals who have different working styles can be successful partners. However, working styles need to be compatible. If the working styles are too different, the differences in working styles can cause strains in the relationship between the partners. The differences can make other issues worse.
And differences in working styles can also create stress and anxiety in the office as employees attempt to satisfy each partner’s expectations.
Disagreements About Fundamental Business Decisions
It is common for partners to disagree on various business decisions. The partners discuss their differences and analyze the options to come to a decision that all partners can accept. However, if partners aren’t able to compromise and collaborate, the partnership suffers. Unresolved issues can lead to disruptions in business that causes the partnership to lose money and clients.
If a partner’s business philosophy or goals for the business are completely different or incompatible with the other partners’ philosophies or goals, it indicates that a partner may be ready to leave or the partnership may end.
A Partner Is Not Contributing
Each partner is responsible for carrying his or her weight for the partnership to succeed. If a partner fails to carry his weight, the business suffers. Relationships between the partners also become strained as other partners are forced to take up the slack left behind by a partner who fails to perform consistently. An imbalance in duties and benefits can create problems between partners that are irreparable. An unbalanced workload is a key sign it might be time to end the partnership.
Communication Has Broken Down
Communication is another key element of a successful partnership. A breakdown in communication is often a sign that a partnership is on the way to a breakup. For example, partners cannot communicate except in writing without arguing, and written communication is beginning to show the same breakdown as verbal communication.
Preparing for a Partnership Break Up — The Partnership Agreement
Partners and businesses change over time. Your partnership agreement wants to allow for change and growth, including a potential breakup.
Preparing for a partnership break up begins with the partnership agreement. You don’t enter a partnership with the intent that the partnership will fail. However, it's helpful to assume that the partnership will end at some point. Working under the assumption that the partnership won’t last forever can make a partnership break up much easier if it occurs.
A comprehensive partnership agreement is a legally binding contract between all partners. It defines numerous aspects of the partnership, such as partner rights and duties, partner contributions, allocation of losses and profits, the authority to make decisions, and the management structure. A well-drafted partnership agreement also contains terms related to the exit, death, or disability of a partner.
Partnership Agreements and the Exit of One Partner
A partnership does not necessarily end when a partner exits. The remaining partners may continue with the partnership. Therefore, your partnership agreement covers what happens when a partner wants to leave, becomes incapacitated, or dies. A good agreement outlines the process and provisions for replacement of a partner, buyouts, and shifts in responsibility between the remaining partners.
Partnership Agreements and Preparing to Dissolve a Partnership
If a dispute between partners cannot be resolved or the partners want to end the partnership, a concise set of steps within the partnership agreement that dictates how to dissolve the partnership can make the process efficient and less costly. If you don’t include terms in your partnership agreement that governs dissolution or the exit of a partner, state law dictates how to dissolve a partnership. Setting your terms for the dissolution of a partnership is typically better than allowing the state to decide the procedure.
Common steps involved in dissolving a partnership begin with a formal vote by the partners to end the partnership. Record the vote in writing. The next steps typically involve arranging to pay partnership debts, liquidate partnership property, make final distributions of partnership profits, file final partnership tax returns, and file other required documents with the state or taxing authorities to dissolve the partnership.
A partnership agreement with detailed steps for dissolving a partnership can avoid additional disputes that could arise when partners want out of a partnership. It could also prevent costly and time-consuming litigation for the partners.
Ways to Make the Breakup of a Partnership Less Painful and Costly
Ending a partnership can be difficult. There are ways you can make the transition easier for yourself and your partners.
Don’t Ignore The Warning Signs
Warning signs of a potential breakup can be difficult to see. However, if you notice any warning signs of a partnership breakup, don’t ignore the signs. Signs of a partnership breakup allow you to prepare for your exit before things become too contentious to allow an amicable departure.
Review Your Partnership Agreement
Before taking any actions to leave the partnership, review your partnership agreement. Knowing your legal rights and obligations under the partnership agreement can help you create a strategy to exit the partnership with as little drama and negative financial consequences as possible.
Talk To A Maryland Business Attorney
Having a lawyer review the partnership agreement and advise you of your rights and obligations can help avoid litigation. An attorney can also help you develop an exit strategy that provides the highest level of personal liability protection while protecting your interest in partnership assets.
Keep Communications Open And Honest
Whenever possible, keep the lines of communication with your partners open and honest. Productive discussions with your partners can ensure a smooth transition when a partner leaves. It can also preserve the personal relationships between the partners.
Pay All Partnership Debts
If the partnership is dissolving, pay all partnership debts before distributing any assets. If you are exiting the partnership, it is wise to ensure all debts are paid that could incur personal liability for you.
For debts that cannot be paid in full, obtain an indemnification agreement from the remaining partners. The agreement holds you harmless for any liability or the debt. While a hold harmless agreement doesn’t release your liability with the creditors, it gives you a legal cause of action to sue the other partners if you are held personally liable for the debt.
Hire A Forensic Accountant
Sometimes, it may be necessary to protect yourself by hiring a forensic accountant. A forensic accountant analyzes the books and records of the partnership to determine if there are any discrepancies or problems. If so, address those issues before leaving the partnership. After leaving the partnership, you don’t have access to the books and records without a court order. Also, a partner could destroy evidence of misconduct and errors after you exit from the partnership.
Winding Up Partnership Business
If the breakup results in the dissolution of the partnership, the partnership continues for a limited time to wind up the business. Winding up the business may include completing current contracts, assisting clients in locating a new firm, paying final debts, filing final tax returns, selling partnership assets, and making final distributions of property or money to partners.
Each partner typically has a right to participate in the steps to finalize the partnership dissolution. The partnership agreement may address this matter. If not, it's helpful to discuss and draft an agreement that dictates which partners have the authority to dispose of assets and make decisions during the period of winding down the partnership.
Notify Creditors Of The Dissolution
It is wise to publish a notice of the partnership’s dissolution to avoid personal liability for partnership debts after the partnership dissolves. The partnership can send notices to clients and creditors, but a public notice published in the newspaper can help ensure that any creditor or client overlooked receives notice of the dissolution.
Depending on the type of partnership, the partners may have to notify clients they have the legal right to obtain copies of their files before the business ends. There could also be time requirements for these notices that give clients a certain number of days to request copies.
Consider Mediation Or Arbitration
If you and your partners cannot agree upon the details of the partnership dissolution or a partner’s exit from the partnership, mediation could be productive. Having an impartial third party to facilitate the discussions can help partners work through their issues. If partners cannot mutually agree, arbitration could be effective, while being less costly and time-consuming compared to litigation.
Try To Compromise
Make a list of all the items and issues to resolve before a partner exits the partnership or the partnership ends. Prioritize the items from most important to least important. Having this list helps you decide which points you will compromise. By compromising on terms not very important to you, you build goodwill for the items that are most important.
Breaking Up is Hard to Do — Even for Business Partners
Besides the financial and legal aspects of ending a partnership, there may be emotional consequences of breaking up with a business partner. In the heat of the moment, you or your partner may say things that are unnecessary or untrue. Having a Maryland business attorney help you with the matter can reduce the chance that emotions rule the dissolution of the partnership or your exit from the partnership.
A Maryland business attorney explains your legal rights and the legal process of exiting from or ending a partnership. The attorney helps you protect your personal interests as you move forward after ending the partnership.
