Can You Force a Business Partner Out?

To force a business partner out, look to the partnership agreement to determine the requirement for forcing or buying a business partner out. If the partnership agreement is silent or doesn’t exist, there must be a legal reason to take the partner to court, e.g., stealing money, not performing their partnership responsibilities, etc.

Forcing A Business Partner Out, Example

Mark, Jon, and Billy formed a business partnership five years ago. The three brothers own a successful video game arcade in San Bruno, California, called Game On. For many years, business was excellent, their relationships flourished, and the siblings made an excellent profit.

However, as the brothers grew older, they prioritized different things. Jon and Billy, both in their 40s, began discussing plans to expand the business into other cities and markets. However, Mark, the oldest at 51, sought to keep the business and spend time with his family.

Jon and Billy offered to buy Mark out, but he refused. Instead, Mark began creating problems for his brothers to prevent them from changing the nature of the business. He canceled important meetings and refused to deliver important messages, sabotaging the business. He also began taking long lunches on the company dime.

Jon and Billy knew that Mark’s behavior was meant to stop them from growing the business. Mark didn’t need the money; he just wanted things to stay the same. Nevertheless, his two brothers could not continue. They knew Mark’s negative behavior could bring down the company they worked so hard to build. Jon and Billy had families too, and they could not afford to have their older brother behave so selfishly.

The brothers’ tensions grew worse until Jon and Billy decided to force Mark out of business. First, however, they wondered about the legal ramifications. Could they force their older brother out of business? Was their desired action justified? If so, how would they go about it?

All relationships go through complicated periods, and business relationships are no different. As our lives change, some relationships grow and flourish. Other times, we know it is the right time to end a certain relationship and move on to the next experience.

Business relationships are no different; for Mark, Jon and Billy, it seems that the relationship has ended. However, when one or more business partners want to dissolve their relationship, the process depends on the circumstances.

It is always preferable for business partners to terminate their partnerships on good terms. When business partners dissolve the partnership amicably, they usually can have productive discussions about the company’s future and ensure that everyone feels satisfied with the result.

Realistically, some business partnerships do not end on good terms, and sometimes partners grow stubborn or resentful, and a rift forms. So, what is the procedure when one or more partners seek to force another partner out?

First, the business partners should consult the company’s partnership agreement. Often the partnership agreement contains agreed-upon rules for the dissolution of the company. In addition, some partnership agreements feature provisions about buyouts or address the idea that one or more partners may want to leave the company at some point.

However, what happens when a business lacks a partnership agreement or the document does not address dissolution? In this case, business partners who seek to dissolve the business or force a partner out of the company should do three things:

Comply with state laws regarding the partnership
Comply with federal laws regarding the partnership
Contact a business attorney

Sometimes, business partners cannot avoid disputes, and they know they must make a change. At some point, many business partners wonder if their partners can force them out or if they are legally able to force their partners out.

This article will cover the legal rights of business partners who seek to force a business partner from the company. We will also address the rights of partners pushed out of their companies.

When partners cannot reconcile, they must make significant changes. First, however, all business partners must understand how their partners—or themselves—can be pushed out of business.

What Defines a Business Partnership?

When business partners come together to form a business, they create a legal relationship. Business partners share:

Operation of the company
Ownership of the company

Since the partners share ownership of the business, they also share profits and losses. While corporations are viewed as separate entities from owners, business partnerships are not.

This distinction means that the partnership owners are responsible for the company’s gains and losses and report these shares on their tax returns. However, shareholders own corporations, and the shareholders are not personally liable for the corporations’ gains and losses.

Business owners must register their partnerships in the state where they conduct business. When the partners form the company, they usually sign a written Operating Agreement that outlines the business’ organization, structure, and partners’ duties.

Operating Agreements: What They Include

Operating agreements differ based on the business, industry, and desires of the partners, but typically they include the following provisions:

The way the partnership is managed
The way disputes are resolved
How profits and losses are distributed among partners
How partnership dissolution works
How assets will be distributed in the event of dissolution
The process through which a partner can leave the partnership

General Partnerships

General partnerships are the standard format of partnerships. Business owners create general partnerships when they join together to run a for-profit company.

Typically, the company’s partners share equally in both profits and losses. Additionally, the partners assume financial liability for the partnership’s debts, just as they share in the business’ profits.

Often, partners begin their business journeys with similar goals, but their visions for the company begin to differ. Sometimes, business partners reach a point when they desire to leave the partnership but are unsure how to do so. Other times, a business partner seeks to push another partner out of business. This desire exists because one partner is not working, harming the business, or not abiding by the terms of the partnership agreement.

However, it does not always make sense to force a business partner out, and business partners should be wary of the legal terms of this action and even resulting lawsuits.

When a partnership falls apart, sometimes the owners can solve the problem without legal action. Honest dialogue is one way that business partners find they can persevere through tension and arguments. Ideally, partners can leave the business on good terms or dissolve the business without too much trouble or drama.

Business partners often ask their attorneys two questions:

Can my partner force me out of business?
Can I push my partner out of business?

The answers to these questions often depend on the terms of the partners’ signed operating agreement. Typically, business partners can push their partners out based on:

Violating state and federal laws
Violating the terms of the partnership agreement

However, some partners who did not violate the partnership agreement or engage in illegal conduct can still be forced out if a court rules that the partners should terminate the company.

An Example

George and Chip are business partners who run a taco stand called Frito Burrito in Fresno, California. For the first five years, the two restauranters got along well, and the business succeeded, but over the last year, their relationship has deteriorated. So when George finds out that Chip has been spending his “work days” at the beach instead of the office, he seeks to force Chip out of business.

George consults an attorney, and together they go over the partnership agreement. The document clearly outlines the partners’ necessary day-to-day duties, and it is easy to see that Chip has been avoiding all of his tasks.

Since Chip stopped working for over a month, he violated the partnership agreement. However, with help from his lawyer, George can remove Chip from the company and find a new partner who is a hard worker and dedicated to the business.

What Rights Do Business Partners Have?

When business relationships become strained, partners begin considering various scenarios for dissolution. Sometimes, one partner attempts to force the other out. Other times, partners are unsure if they are legally able to force someone out of business and what the consequences may be.

For example, Catarina and Helena run a catering business called Tastes To Go in Oakland, California, but their relationship quickly deteriorated after a year. Finally, Helena tells Catarina she is fed up with her attitude and plans to force her out of business. However, Catarina is the person who works hard, and Helena is the problem.

Catarina looks at the two women’s signed operating agreement and realizes that Helena cannot force her out of the company because she has not violated the agreement. So instead, Catarina ends up buying Helena out and continuing to run a successful catering company.

When a business runs into problems and one partner threatens to force the other out, the best thing to do is first looks at the operating agreement. Many operating agreements include rules about partner disputes, such as buyout provisions.

Buyout Provisions in Operating Agreements

Some business partners add a buyout provision when creating and signing the operating agreement. These provisions allow partners to sell their share of business ownership and include rules for how partners can buy each other out.

No Operating Agreement? Consult State or Federal Laws

When a business dispute occurs, and the partners didn’t create an operating agreement, business partners should look to state or federal laws for guidance.

If one partner has violated federal or state laws, the partnership may be ordered to dissolve by the court, or the court might remove the wrongful partner from the business.

In some cases, the court may order that the partners dissolve the business regardless of whether someone broke the law. If a partner does not break federal or state laws but forces them out of the partnership, they have rights. However, the partner who was removed may still be able to view the company’s books and records, so they must contact an attorney.

Will Business Disputes be Decided in Court?

When business disputes involve lawsuits, the courts usually become involved. When this occurs, the business partners involved in the dispute should contact experienced attorneys.

Partnership Dissolution

When one or more business partners seek to terminate the partnership, they want to dissolve it. In California, this process depends on whether the company is a “partnership at will” or the partnership has a “fixed term.”

In partnerships at will, the business partners did not agree on a fixed term for the business. If at least half of the partners want to disband the company, they may dissolve it. This policy is called the “express will to dissolve.”

In fixed-term partnerships, the partners can dissolve the business when the agreed-upon term ends or use “express will.”

In both scenarios, partners may also consult the partnership agreement since many agreements include instructions regarding the dissolution of the business.

What Actions Should Partners Take When Being’ Forced Out?’

When a business partner is pushed out of the company they helped to build, they must protect themselves. The best way to do this is to consider and insert protective clauses within the partnership agreement.

An experienced business lawyer can help partners formulate an agreement that suits each partner and protects them from being forced out. Helpful partnership agreements often include specific procedures for:

Dissolution of the partnership
Buyout of partners
Sale of the business

Additionally, partners who are forced out of the company still have rights. Depending on the situation and the partnership agreements, these rights may include:

The right to receive compensation
The right to access company records

If your business partner denies you these rights, you must contact a licensed business attorney and file a claim.

Why Contact Nakase Wade?

At Nakase Wade, our California business lawyers and corporate attorneys provide knowledgeable, expert representation to business partners of all backgrounds. We are here for you if you are dealing with an unexpected business dispute or simply need advice regarding a business partnership.

Our legal team understands that no business partnership is perfect and that business disputes come in all shapes and sizes. In our first meeting, we will talk through the details of your case and concerns and help strategize how to best fix the problem.

While business partners can sometimes push other partners out of the partnership, these actions must be justified and legal. If you are unsure of the legality of your partner’s actions, contact Nakase Wade for a free consultation today.

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