How to Split from Your Business Partner

Splitting up from your business partner is discussed in a few other posts on this website. First we discuss the friendly break up, then we address some of the aspects of the not-so-friendly divorce. The following is another look at your options for either splitting with your business partner or leaving the business altogether. These options assume a two-partner business i.e. a closely held company.

Option 1: You buy out your business partner

Option 1 is to buy out your business partner. This option is simple and in many ways ideal. It allows you to continue your business with no restrictions. You would have sole ownership of the Company provided that you satisfy the payment terms of the buy-out agreement.

Option 2: You sell your shares in the Company to your business partner (or 3rd party).

Option 2 is to sell your shares of the business to your business partner in which case your business partner will continue under the current business name/entity.

Here, if your business partner agrees to purchase your shares then it will likely be subject to a buy-out agreement which will typically come with restrictive covenants such as non-competition provisions and non-solicitation provisions.

The result is, you may be able to establish a competing business but your activities may be extremely limited.

Option 3: You gift (transfer without receiving any money) your shares in the Company to your business partner (or 3rd Party) and start your own competing business venture.

Option 3 is to gift your shares in the Company to your business partner. In this case, you receive no money for your shares.

The problem aside from not getting paid for your shares is that while you can start a competing business, you will not be able to directly solicit your prior clients without subjecting yourself and your new company to liability under a theory of tortious interference with contractual/prospective business relations.

This option assumes there are no restrictions on transfers either in an operating agreement or a buy-sell agreement.

Option 4: You dissociate from the Company (Voluntary Dissociation)

Option 4 is to dissociate from the Company. The decision to dissociate from the Company permits a dissatisfied business owner to extricate him/herself from the business and cut off any obligations he/she might have for future endeavors, subject only to the terms of a relevant shareholder/operating agreement.

The freedom to dissociate from a Company may come at a steep price however, particularly where neither the statute (Business Corporation law, Limited Liability Company Law, or Partnership Law) nor the relevant “shareholder agreement” compels the repurchase of the dissociating business partner’s shares in the Company.

Therefore, while you may seek to dissociate from the Company, absent something in a written agreement between the business partners, there is no requirement that the Company or your business partner purchase your shares. So, if you dissociate you may not receive any money for your shares.

The other problem aside from not getting paid for your shares is that you will not be able to directly solicit your prior clients without subjecting yourself and your new company to liability under a theory of tortious interference with contractual/prospective business relations.

Option 5: You and your business partner agree to dissolve the business

Option 5 is you both agree to dissolve the business (hence “voluntary” dissolution) and you go your separate ways, probably splitting the clients and assets after you paid the Company debts. After the business is effectively dissolved, you can start another business and solicit previous clients without concern about interference with contractual relations issues.

Dissolution is the most common means of effecting a split between business partners. Dissolution happens in one of two ways. (1) Voluntary Dissolution or (2) Involuntary Dissolution.

Voluntary Dissolution, as described here, refers to the situation where the parties voluntarily agreed to dissolve the business and essentially go their separate ways. Dissolution must comply with statutory requirements and procedure. After the parties agreed to dissolve the business, the company enters what is called the winding up Winding up basically refers to the process where in general, a company winding up without court supervision must discharge its debts before it can distribute anything to its stockholders. Therefore, in order to wind up the company in most instances the company must pay off its debts first before distributing assets to the business partners.

Option 6: You dissolve the business by judicial dissolution

Option 6, Judicial Dissolution, is also referred to as Involuntary Dissolution. Involuntary Dissolution of a Company occurs where the parties cannot agree on whether/how to dissolve the business.  As a result one party (the petitioner) files a petition with the Court seeking to dissolve the business on some statutory grounds. Those statutory grounds will vary but basically they are either:

  • deadlock between the parties or
  • some oppressive conduct from your business partner(s)

These are the possible outcomes of a petition for dissolution:

  • the court denies your petition – in which case your business proceeds.
  • the court grants your petition and the business gets dissolved and the assets/clients get split
  • the court allows your partner to buy you out at “fair value”

The result will depend on the basis for seeking dissolution and other facts and circumstances which are difficult to ascertain at this time.

NOTE: “Fair value” may not be what you have in mind. Therefore it is a risk to put “fair value” in the hands of the Court to determine.

The following are Not Viable Options:

You expel your business partner out of the business (Involuntary Dissociation). This may be an option in some states but in New York it is not a viable option.

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