You set up a business with a friend or a relative. Each of you owns 50% of the company. You also both signed the debt for the business. It’s a classic situation: One guy is done with the business, and the other wants to keep going. Now what? It’s tricky when you both signed for the debt and it’s all on both of you. I’d love to claim there’s a magical formula, but there isn’t. The solution depends on the specific facts of each case. Dissolving the partnership should be the last step. Before that, there’s a buyout (with the help of a business attorney), or maybe a new partnership deal that both of you can live with.
In a few equal partnerships, one partner only ever put up money and the other could run the place alone. It’s more often the case that you each take over a few things, and you each come to the table knowing you’re splitting things 50/50. What you get is a business that can’t work without both of you. Equal partnerships are difficult to dissolve because they are usually based on the skills and talents of both partners, and the partners divide the responsibilities of the business between them. Because the partners own the business equally, the partners also share the profits and losses.
The Partnership Agreement or Operating Agreement
So start with the paperwork you both signed: the partnership agreement or operating agreement. Look for sections titled “business purpose,” “management,” “resolution of disputes,” “distribution of profits and losses,” “dissolution and winding up,” or “buy-sell agreement.” Many have a buy-sell provision, and those spell out whether a partner can leave, how to buy out their share, and what happens to the money. If your operating agreement provides a procedure for ending a 50/50 partnership that you both signed for the debt, you should follow it. All of these questions are probably in the agreement, but if they’re not… you’re in a real pickle.
Can you push your partner out? Normally, yes, if they broke the law or the agreement. A partner may be terminated if he or she violates the terms of the partnership agreement. When a partner is terminated, the agreement will dictate what happens next. Even a partner who did nothing wrong can sometimes be forced out if a court rules the company should end.
Take Fred and Justin, equal partners in a Los Angeles wine bar. Fred was putting in more than 80 hours a week. Justin admitted he worked about “ten hours a week, give or take.” Fred told Justin he was fed up with his ego and attitude and wanted to buy his share of the business. Justin refused. Fred’s lawyer asked for the partnership agreement, and it said both partners would share the work, 40 hours a week each. That put him in the wrong. The discrepancy was exactly the point: the partnership agreement’s terms weren’t being met. With his lawyer’s help, Fred got Justin to agree to a buyout. Justin sold his share to Fred. The bar has new partners now and is one of the top wine bars in LA.
If there is no written agreement, you are in the toughest spot, and you have to look at state law. If a partner has violated state or federal law, a court can dissolve the partnership or kick the offending partner out. Or a court might tell the partners to dissolve the company even if no one has done anything illegal. The removed partner still has rights, and may have access to company books and records, so that partner should consult an attorney.
Buyout Route
If you go the buyout route, expect two fights: price and structure. Partners who are already feuding rarely agree on a price for the exit, and when you can’t agree on a number, an attorney can negotiate for you. If one partner pays for the buyout out of company profits, he or she is in effect buying the company by using the company’s money. That can badly deplete the company’s funds, so try to avoid using company money for an acquisition unless you’re really set on doing that. If there are no reserves, the buying partner has to find the money somewhere else. When there’s a lender in the picture things can get a lot messier. Remember that you can’t un-sign an IOU, and if you both signed for the debt, you are both responsible for it. Have an attorney go over any buy-sell deal before you sign.
Breaking up a Partnership
If you decide to end it, telling your partner it’s “over” may technically end the partnership. Don’t assume you can just let things be and walk away and hope for the best. Do it in order. First, talk. No hard feelings, no ego, just open communications. Come to the meeting with a list of questions - and ready to answer the ones your partner has for you.
- Why are you trying to dissolve the partnership?
- Is the problem fixable?
- What are each of your obligations?
- Does everyone agree on the need for a removal or dissolution?
- Is the business even going to live on if you’re out?
- Does the company have a plan for handling its debts and any future liabilities?
- And what’s the plan for winding down the company?
Keep detailed notes of your discussion, with a copy of each partner’s answers.
- Second, go back to the agreement. Many partnerships have agreements in place with lots of specific provisions. In some cases, the partnership agreement will address how to handle a dissolution. Some require a majority vote to end the partnership or remove a partner.
- Third, file the dissolution of partnership document. Find the proper form, fill it out, and file it with your state. Skipping it can complicate your finances and drag the process out. Keep the copy for your records.
- Fourth, tell everyone who needs to know that the partnership is dissolved and is in the process of winding up. That means all vendors, customers, and anyone else who deals with the business, including employees, landlords, clients and government entities.
- Last, close the accounts. Make sure every creditor knows the business is dissolving. Close the business accounts. Shut down credit accounts too, follow the agreement on dividing assets, and pay off the company’s debts and loans, suppliers included.
What if you want out and your partner won’t buy? Whether anyone can be forced to buy your share depends on the agreement (if any) that you and your partner signed. Most buy-sell agreements leave it up to the partner whether they want to sell, and some agreements have rules partners have to follow before they can buy one another out. Read the agreement, get a business attorney, and urge your partner to do both.
You can break up with a 50/50 business partner any time you want to, but there’s a mountain of legal and financial detail to clear before you’re officially divorced. Requirements for breaking up a partnership vary from state to state, so review what the rules are in the state where the business is located. But if both of you agreed to be responsible for the debt, there might be no clean way out of the business. Even after the partner is gone, you still have to manage the liability on the debt.
