Is It Time For A Business Divorce?

NO MORE SUNSHINE AND RAINBOWS. WHEN IT IS TIME FOR A BUSINESS DIVORCE.

Business Separation and Dissolution: Key Considerations
When friends start a business, it’s all sunshine and rainbows. They trust each other and often don’t think
about what happens when the business goes belly up, or when one of them feels like they’re carrying
the whole thing on their back. Sometimes, they just have different ideas about where the business
should go. This article identifies some of the sticky situations and things to think about when business
partners decide to call it quits.

1. Control over the Existing Business: The partner continuing to run the business typically assumes control. This could be determined by the terms of the partnership agreement (operating agreement, or bylaws), voting majority, or negotiation. It is essential to respect all contractual obligations and corporate governance rules during this process.
2. Intellectual Property and Confidential Business Information: Ownership of intellectual property and confidential business information should be clearly stipulated in the original governing documents. However, this does not always happen. When the partners’ agreements do not address these issues, they must negotiate a fair division. Licensing agreements can also be drafted if both parties have an interest in continuing to use specific intellectual property.
3. Buyout Terms: It’s crucial that buyout terms are fair, transparent, and do not impede the existing business’s future operations. The buyout often includes a calculation or valuation of the departing partner’s equity value. If this process is not stipulated in the agreement, an independent third- party valuation may be needed.
4. Non-Competition Associated with Buy-out: Non-compete clauses are often included in buyout agreements to prevent the departing partner from entering into a similar business within a specified time and geographical area. It is crucial that these clauses are reasonable, enforceable, and comply with Colorado law.
5. Fiduciary Duties: All partners owe fiduciary duties to each other and the business, including good faith, fair dealing, and confidentiality. Even during termination, these duties should be honored until the relationship officially ends. In Colorado, non-manager members do not owe fiduciary duties to the other members or the company unless such duties are articulated in the company’s operating or other agreements.
6. Winding Up of Entity: If the termination leads to dissolution, assets need to be liquidated, liabilities paid off, and any remaining funds distributed among partners per the partnership agreement. Careful records and transparent communication are key to a successful winding up.
7. Excess Liabilities over Assets: If the entity’s liabilities exceed its assets, this becomes a case of insolvency. In such circumstances, the priority must be to pay off creditors to the extent possible. A bankruptcy filing may be necessary depending on the extent of the shortfall. Partners should consult with legal counsel on the appropriate steps to take, keeping in mind that they may be personally liable for the company’s debts if they have provided personal guarantees or if they make distributions to themselves after it becomes apparent that the business is not solvent.
8. Forced Dissolution due to Deadlock or Serious Mismanagement: In certain cases where the remaining partners are unable to agree on critical business decisions, resulting in a deadlock, or where there is severe mismanagement, it may be possible to force a dissolution of the company. Such an action typically requires a court order, and the criteria and process vary depending on the entity type. This option should be seen as a last resort, as it could have significant financial and reputational impacts for all parties involved.
9. Tax Implications: Termination and buyouts could have significant tax implications for both the business and individual partners. It’s advisable to consult with a tax professional to understand and minimize potential liabilities.
10. Liability Concerns: Liability associated with past business operations could remain after termination. All partners should understand their potential liabilities and consider options for limiting exposure, such as insurance or indemnification clauses.
11. Indemnification to Withdrawing Business Partner: If agreed upon, the remaining partners could indemnify the departing partner from certain liabilities arising after their withdrawal. This requires careful consideration and clear stipulation in the buyout agreement.
12. Non-Disparagement: A non-disparagement clause can prevent parties from making harmful or defamatory statements about each other after the termination. This could protect both personal reputations and the business’s standing. When business partners split, it is important to work things out in a way that’s good for everyone involved. Business partners must put their feelings aside and focus on what makes sense for their wallets.

©2023 Gregory M. O’Boyle. Greg O’Boyle is a Colorado Springs attorney who practices primarily in the area of commercial litigation. Greg is a partner at Alpern Myers Stuart LLC. He can be contacted at grego@coloradolawyers.net, or an appointment can be made by calling his assistant, Adrienne, at 719-226-7745