What Happens if One Business Partner Wants Out?

When one business partner wants out, the partnership dissolves unless there is a buy-out. Before filing for business dissolution, the company must pay off its debt and satisfy its business obligation. If there is a buy-out, the value of the buy-out must be agreed upon.

One Business Partner Wants Out, Example

Xavier, Ryder, and Ezekiel are successful partners in the coffee shop Rex Roasterz they started five years ago in Newport Beach, California. Although the three partners have enjoyed a productive five-year run, and their French roast is beloved by the locals, not all the partners are still on board.

Xavier and Ezekiel are devoted to Rex Roasterz. The two partners want to expand the business and commit their professional lives to the coffee and service trade.

However, Ryder has been having second thoughts. Not only does he dislike the service industry, but he also wants to go back to graduate school. Ryder wants to obtain his MBA and start a new sole proprietorship in a new industry.

When Ryder tells the other partners he wants to leave the partnership, Ezekiel and Xavier are upset. They don’t understand why Ryder, a hard worker, and valuable partner, wants to leave the company they built that just became profitable. But, if that is even possible, Xavier and Ezekiel also do not want to deal with adding another partner.

Ryder, however, has decided he wants to leave the partnership and move on, and his partner’s attitude only makes the situation more difficult. To make matters worse, when the three partners formed the coffee shop, they did not create a partnership agreement.

Now, Ryder’s partners are angry, the business is suffering, and Ryder is sure of one thing: he wants out of the partnership. However, Ryder wonders: what should he do first?

When one business partner wants to leave the business, it creates a difficult situation for everyone involved. When the partners have no agreement to fall back on, one partner’s desire to leave becomes even more challenging. Sometimes, when one partner wants out of business, the company simply cannot survive.

Regardless of the process’s difficulty, business partners leave their partnerships for various reasons. Some partners who want out can avoid conflict and execute a successful departure without serious disputes.

This article will provide suggestions for partners who want to take the risk and leave their business partnerships. However, before making the departure official, partners should behave responsibly and protect themselves by following these steps.

Can a Business Partner Leave a Partnership Without an Agreement?

Leaving a partnership is a dramatic action; sometimes, there are no easy answers regarding how to do it correctly. However, sometimes individuals are certain that it is time to make a change.

Leaving a partnership becomes more complex when there is no partnership agreement. When one partner decides to leave, and the company has no founding documents to follow, they are taking a significant risk. If things go poorly, disputes can form, and some partners become embroiled in legal issues. In extreme cases, partners file lawsuits against each other for leaving the partnership.

However, leaving a company partnership without an agreement is possible, and many entrepreneurs have managed to exit their businesses successfully. Often, even without a partnership agreement to follow, state laws dictate what the partners must do. Therefore, it is most likely that when one partner wants out of business, they must dissolve the partnership.

Problems arise when dissolution is necessary, but only one partner wants it to happen. Conversely, partners who want the business to continue are often resentful and angry. Ideally, the partners can work through these differences with productive dialogue.

How to dissolve a partnership in California?

When business partners find themselves leaving a partnership, they should protect themselves. Here are a few tips for partners who want to leave their businesses.

Organize All Company Records

It is vital for the partner who wants to leave to maintain organized business records. Most partners keep careful records, but now is a good time to take stock of all company files and documents, including founding agreements, if they exist.

The partner who desires to leave should collect partnership records, organize them, and ensure they are safe yet accessible. When questions arise, these records will be indispensable in answering them. Additionally, partners can sometimes settle difficult disputes by checking business documents.

Attorneys, accountants, and tax specialists will also seek to access the partner’s records, so while they should be kept private, they should also be accessible by request.

Partners who do not possess a partnership agreement may be surprised when some individuals doubt the partnership’s existence. It is not uncommon for a resentful partner or determined attorney to ask whether a business partnership exists.

Collecting proof is the only way to deal with this line of questioning. What documents are vital to keeping on hand? Here is a brief list:

Partners’ sworn testimonies
Bank statements
Business plans
Contracts signed by partners
Emails
Messages, including texts
Transaction records

These documents can help the partner prove that the business existed and the partners shared it. In addition, relying on these documents will protect the departing partner if the other partners or their lawyers challenge their claims.

Review Liabilities and Assets

As the process of leaving the partnership begins, there are bound to be questions about the company’s debts, assets, liabilities, and financial projections. Therefore, partners preparing to leave the business should review all of this information to make an informed decision.

The process of reviewing the company’s financial data can be complex, so here are a few tips:

Create a written list of liabilities and assets
Give each asset a specific value
Consult a third party about value when there are questions regarding valuation

Ideally, the partnership documents include a process for valuing the company’s assets and also liquidating them. However, many partnership agreements do not include these instructions. In this case, it makes sense to contact a third party for an independent valuation that all the partners can agree on.

After the company is correctly evaluated, the best-case scenario is that the proceeds from the sale of the business pay off any company liabilities or debts.

If the partners dissolve the company, each can use their share of the company assets to pay off any partnership debts. After the company’s creditors receive payment, any extra capital should be distributed among the partners. To figure out how to correctly distribute the surplus, consult the partnership agreement for the correct ownership interest amounts.

For example, Ty and Will are partners in a law firm, but Will wants to leave. Luckily, the partners decide to dissolve the partnership without disagreement. They are not equal partners, meaning that Ty has a 70% interest in the partnership, and Will has a 30% interest.

Based on his 30% interest, Will is entitled to 30% of any leftover assets after the partnership debts are paid out.

Check on State Guidelines

Without a partnership agreement to guide them, business partners seeking to dissolve their companies turn to state rules and provisions. All states except Louisiana have a Uniform Partnership Act that helps partners establish a blueprint for dissolving their business.

Unless the company has a written partnership agreement that covers dissolution, all partnerships will act following their state’s Uniform Partnership Act.

File a Separation Agreement

Partnership dissolution grows more complex when one partner wants to leave, but the rest seek to maintain the partnership and continue with the business. While usually, when one partner wants to depart, the easiest option is to terminate the partnership, this is not always the case.

Dissolution involves the partners fulfilling their obligations, paying off liabilities and debts, and dividing profits and assets per the terms of their partnership agreement. But what happens when one or more partners seek to prevent partnership dissolution?

When a partner decides to leave, their desire does not dictate the path of the business, no matter how strong. However, when the other partners do not permit a forced dissolution, they do have an option: they can file a separation agreement.

If business partners want to enter a separation agreement with the departing partner, they should first have a business lawyer draft the document. Separation agreements typically:

Clarify the terms of the partner’s departure
Remove the departing partner’s name from all business transactions and loans going forward

All of the partners must agree on the terms of the separation agreement, and often this agreement is contingent upon negotiation. For most partners, part of the process of entering into a separation agreement is renegotiating leases, contracts, and loans. An experienced attorney should be on hand to help with negotiations and the drafting of the agreement.

Once the separation agreement is finalized, agreed upon, and signed, the partner who wanted out is released. But there are a few other elements that separation agreements typically include.

What should a partnership dissolution agreement include?

The partnership separation agreement should include the company’s liabilities, assets, and how much the departing partner will be compensated. Also, the following terms may be included:

The partner’s right to audit the partnership books
A description of how assets and liabilities will be distributed
Certified assurance that the departing partner will not be considered liable for future company lawsuits or problems
Assurances that all debts that still contain the departing partner’s name are paid off
Details of the consequences of the partnership’s violation of the obligations to the departing partner

While leaving a partnership without a partnership agreement is challenging, it is not impossible. All the provisions of the separation agreement are vital, but business partners who depart with no agreement in place should focus on the following:

The division of partnership assets
Paying off the entirety of the company’s debts

Again, a licensed attorney can help make these processes easier and less overwhelming.

How Can Business Partners Reach a Separation Agreement?

For partners, the key to reaching a successful separation agreement is to hold productive conversations. First, the partner must meet with the other partners and make their case, describing why they want to leave and how the process will work. Then, the departing partner should prepare for dialogue and much negotiation.

For all the partners, the goal is to agree upon a separation agreement with mutually acceptable terms and avoid an erroneous dispute. Conflict among partners hurts everyone and can damage the business the partners have worked so hard to build.

If the partners’ discussions are not fruitful or reach an impasse, contact an experienced mediator to join the discussions. Adding an unbiased party to the negotiations can help clarify why the partners cannot reach an agreement.

Can the Departing Partner Sell Company Interests to the Remaining Partners?

When one partner decides to leave, they can sell their shares to the other partners and allow the company to continue. The partner should set a reasonable price based on their research and analysis of the market.

Selling off company interests is a viable option for the partner who wants out, but they should prepare for disagreements over the price of shares.

If a disagreement occurs, the partners can employ an independent expert to estimate the shares’ correct value.

Can the Departing Partner Accept Less of the Profits?

The partner who wants out can also volunteer to take less of the business profits. They can also volunteer not to participate in business decisions until the partners agree on a separation agreement.

Can the Company Hire an Intermediary?

When one partner desires to leave a partnership, it is an understandable situation; but it is also one that can quickly turn volatile. An unbiased intermediary can help get to the bottom of unresolved issues between the partners.

Often, business partners who reach this step in the process cannot agree on how to split up assets or the company’s value. An intermediary can be an attorney, a dispute resolution specialist, or another professional who brings the partners together on these issues. Sometimes, bringing an intermediary in is the deciding factor in creating a strong separation agreement that satisfies all parties.

Why Should Business Partners Who Want Out Contact an Attorney?

Business partners seek to leave their companies for various reasons. Sometimes an individual seeks a new, exciting business venture or wants to return to school. Other times, the departing partner’s reasoning hinges on family decisions, life goals, or a complete change in vocation.

While all business partners should have the right to leave their partnerships, a partner’s departure often creates a messy situation. When one partner wants to leave, and the others want to continue the business, complicated disputes often arise. Experienced attorneys provide intelligent answers to complex disputes and help ensure that each partner is satisfied with the outcome.

At Nakase Wade, our skilled corporate lawyers will help you negotiate the terms of your separation agreement and ensure that the partners pay off all debts and liabilities. In addition, when a company dissolves, the partners must divide all assets and profits equitably, and our attorneys will make sure that each partner is fairly compensated.

Our team is ready to assist you if business partners want to dissolve the company or create a separation agreement. We will help you negotiate your desired terms and ensure that all decisions and agreements comply with the state’s laws.

The California business lawyers and corporate attorneys at Nakase Wade understand that while some business partners want to leave their partnerships, it can be difficult. We are here to help streamline the process and answer all your questions, so contact us for a free consultation today.

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