Protecting Your Business in Circumstances of Conflict
Divorce is typically viewed as the legal dissolution of a marriage between a husband and wife. Likewise, a “business divorce” is the legal separation of the owners, and thus ownership, of a privately-held business entity. Like in a marriage, a business divorce generally indicates a serious disagreement between the owners on how the business should be run. It can also involve equally similar emotional drama as a marital divorce. Several reasons can lead to a desire for a legal separation of business ownership. A business divorce can be clean or messy.
Legal Considerations
Any legal process to end a business relationship will be governed by state law. The law governing the termination of the entity and the rights of its owners can vary depending on the nature of the business entity. It varies based on whether it is a corporation, LLC, or partnership. Additionally, the federal and state tax consequences associated with dividing assets can significantly impact the optimal approach for terminating the business relationship. There are both practical and financial issues. In addition to potential emotional dynamics, this will substantially impact the separation or dissolution of a business.
Conflict is to be Expected
Even when the owners agree to part ways, they may not agree on the terms of separation. Items include how to resolve disagreements regarding ongoing business operations, valuation, payment terms, or the ultimate disposition of the business. A business divorce may ultimately result in a court-ordered dissolution of the company. The lawyer advising the owner or owners must know and understand the rights that may be available to them under the bylaws, articles of incorporation, certificate of formation, shareholder agreement, operating agreement, partnership agreement, and/or applicable state statutory scheme. “Dissolution” of a business does not always mean the same thing. Dissolution of the business relationship can involve liquidating the business assets, selling the company (even to an existing owner), or dividing the company’s assets among the owners for separate, ongoing enterprises. Even when the owners agree on these decisions, implementation may involve complex interpretations and the resolution of murky state and federal laws.
Protecting the Business
A business owner must use the methods set out in the business entity’s governing documents. Specific procedures are required or permitted by state law to continue the operation of the business during the “divorce”. This can be particularly challenging during times of conflict. In most cases, one or more of the owners may want to continue in some form of the business. That owner needs to maintain their value during this time of conflict and transition.
Good relations with key employees and outside partners during the transition can be critical to the continued success of the business. Obtaining prompt, practical business and legal advice is imperative. That advice ensures that the business’s assets are not unnecessarily wasted on funding litigation between the owners. Good, practical, legal advice can help avoid protracted litigation that could cause financial ruin for the business. Failure impacts not only the owners but also investors, suppliers, and customers. Without effective legal counsel, the owners and the business can be harmed. A successful business can be destroyed when the goal is to obtain a “divorce” of the owners.
For more information on business divorce and how to protect your business, contact us. We’ll help you decide what your options are.