Business Partnership Advisor
Together, we can fix your business and partnership problems
Chris Reich, Business Luminary
One Partner Wants to Dissolve Our LLC
Can one partner force the dissolution of an LLC partnership? The short answer is “yes”. If there are two partners, each holding a 50% stake in the business, one partner can force the LLC to dissolve. If there are more partners, it gets more complicated.
Can One Partner Dissolve an LLC Partnership?
The answer is YES under certain circumstances. If there are two equal partners in the LLC and one of them wants out, dissolving the LLC is an option. Certainly, to be clear, if a partner leaves a two partner business, there is no partnership. Period. The end.
State laws vary a bit so it might be a good idea to consult with an attorney in your state. But before you focus on dissolving the LLC, consider the other issues at hand first.
The Same Old Question: Do You Have Operating and/or Partnership Agreements?
These documents do not override your state’s laws governing LLCs or Partnerships but they may set the rules about how the process is to proceed internally. Always start with a review of all the existing and in force documents and contracts. If you have those agreements, pay careful attention to their provisions. You can modify the terms by agreement as long as you comply with state law. The documents are often boilerplate templates that partners dispute over when the documents are actually needed. Let’s say that your Partnership Agreement says that a partner may sell his interest back to the company for $1,000,000. The company is not worth anywhere near that. The partners can agree on a different amount despite the clarity of the existing contract so long as the new agreement is documented and signed.
Focus on the Goal First
If you’ve reached a point where you must leave yourLLC Partnership, start by thinking about what the ideal end of the process looks like to you.
When there is tension in a partnership and somebody reaches a point that they must get out, the first position is typically a desire to just get clear of the business and never think about it again.
Once it starts to sink in that you will be leaving the investment of money and time behind, the next position usually includes a desire to get back what was put in.
When that gets rejected, the price starts going up. Tension flares. That’s when the exiting partner will threaten to take down the business by dissolving the LLC. And, if this dispute ends up in court, that is likely to be the outcome! The court will order the dissolution of the LLC in most cases where there is a dispute between partners.
If your goal is to get out of the relationship and the business and if your desires end there, you can allow yourpartner to carry on with the business. Again, you may need to consult with an attorney in your state about the process but most of the time, this can be done if the business is solvent. At minimum, you will have to dissolve the partnership and file new LLC documents with your state’s Secretary of State. Assuming that revenge is not on your agenda, it can be a good negotiating point in your favor to work with your partner to help them keep the business going.
Another option, of course, is for your partner, the one who wants to remain in business, to simply form a new LLC with a new name. For most smallish size businesses, that change isn’t terribly painful except for the cost of new supplies.
For a 50/50 LLC Partnership, the answer is yes, the departing member can dissolve the LLC. But if possible, why not work it out?
For more complex partnerships, keep reading!
One partner in a 50/50 Partnership Can Dissolve an LLC.
“Think about the goals before you focus on Dissolving your LLC,” says Chris Reich
What If the Partnership is Not 50/50?
If your LLC Partnership has 2 members at say, 60% and 40% and the minority member wants out? Most states will require dissolution of the LLC. Check your state’s laws. It may be possible to take one person out and put another in. (A new, replacing partner)
Here’s the key. If you can work things out, you will be able to achieve everyone’s objectives while complying with the law. If you end up in court, dissolution of the LLC is the most likely outcome. And that’s not just a paper thing. You’ll have to satisfy creditors and split the assets.
What If the LLC Partnership Has More Than 2 Members?
In the case of LLC Partnerships with more than 2 members, the percentages of ownership become most important. To call for a dissolution of the LLC requires a majority vote of the members. In theory, that could be the vote of one of the partners if that partner holds a majority of the ownership.
If there are 3 equal partners, and two of them want out of the LLC, they can call for the dissolution of the LLC.
What if 1 Partner Wants to Continue the Business After the LLC Is Dissolved?
That can be done but a new LLC will have to be formed. I believe that this would be the time to choose a new business name as well even if not required in your state.
Whenever there is a clean break in business, keep it clean! Once people agree to separate and get all the terms settled and drafted, why complicate things by resurrecting the business name and opening yourself to new claims and disputes? If 2 out of 3 partners in a business want to dissolve, then do it and start something new without partners under a new name. And if you need partners as investors, keep them in minority positions.
If the LLC Dissolves What About Our Other Terms and Conditions Such as “Non-Compete” Rules?
In most cases, any rules such as non-compete clauses go away with the dissolution of the LLC. After all, there’s nothing left to compete with. The non-compete clause protects the business from a departing partner who would have an advantage in terms of competing with the business. With the business gone, there’s no means to enforce the agreement. You can’t sue on behalf of a company that no longer exists.
If a clause is meaningful and well-crafted, it could live beyong the dissolution of the LLC. For example, if we had a clause in our agreement that said “in the event the company, The Global Super Bestest Widget Maker, ceases operation for any reason, members shall not use the words “Global”, “Super” or “Bestest” in any new business that a member may form or play any part in the formation of…” (Lawyers wince) In this case, it would be meaningful to enforce because having a known partner in a new business that sounded a bit like the old business could be a problem.
If partners leave an LLC, that LLC may have to be dissolved. It’s important to understand your state’s laws. Changes to ownership are important so don’t ever assume that you can just make changes without properly keeping your state informed. There are tax consequences as well.
Always remember that you can usually achieve your goals if you can reach agreement with all partners involved in the business. If you end up in court, the outcome is likely to be the dissolution of the company.
The best endings come from agreements rather than expensive battles.
“Whenever a partner demands an exit from an LLC, no matter how acrimoniuos the situation, it’s always best to handle things by agreement. To be clear on the rules in your state, talk with an attorney.”
When business partnerships go bad, very often someone wants out. That starts one of two possible processes. The business enters Wind Down and begins the process of closing or the partners start discussing a Buyout.
When the business partnership breaks down, the darker sides of the personalities come through. A dominant partner turns into a bully. A person who does not do well with conflict will withdraw. As the bully gets more aggressive, the pacifist withdraws further. Eventually, the bully gets so angry they are ready to lock the other partner out. The pacifist quits coming in. The next blowout is over money. The course is as logically predictable as what will happen to your car if you hit the highway with no oil in the engine. It will get louder and louder until the engine seizes.
I recommend that partners talk through a specific issue and then draft an agreement (called a resolution) that sets a policy. You can keep this in a binder to serve as amendments (or foundation) to your Partnership Agreement. In this post I’ll explain how to talk about things that bug you with your partner and how to draft a binding resolution to fix the problems.