Business Partnership Advisor
Together, we can fix your business and partnership problems
Chris Reich, Business Luminary
You Cannot Walk Away from a Sour Business Partnership
Well, of course you are physically able to abandon your interests in your business partnership but it’s not the recommended course.
Start with a Document Review
Before you do anything about your soured partnership, review your organization documents. Take a look at the Operating and Partnership Agreements to see if you have provisions for a voluntary exit of a partner. This is sometimes referred to as the ‘redemption provisions’. If you have such documents, they will govern the terms under which you can depart. If there are no agreements in place, the rules are different.
Try to Reach an Agreement
Without a pre-agreed to process in place, you’ll need the agreement of your partner, and others, on the terms of your departure. If you expect compensation for your shares, that will have to be agreed to by your partner. Then, you’ll need creditors to sign off on a release from liability for you. For example, both partners are jointly and severably (usually) responsible for the lease. Leaving the business does not release you from that responsibility. If the business fails long after you depart and the landlord sues for the balance of the lease, you are still on the hook. You don’t want a nasty surprise to bite you later so it’s very important to properly leave a business partnership.
If your partner agrees and all creditors to the business agree to release you, you can get out with little worry with one big exception: taxes. You cannot escape any tax burden that was incurred, even if not discovered, while you were still part of the business.
Sounds like a possible way out? Not so fast. If the business is doing well, your partner won’t be excited to offer you much for your interests. If the business is struggling, your partner isn’t likely to release you from responsibility.
If you are in a sour partnership and feel hopeless, get guidance before you do something that harms your position.
I’m here to help people that feel stuck in bad business partnerships. ~ Chris Reich
There Must Be a Way Out
If you cannot get out by agreement, you still have options. You can walk away, lose your stake, and risk future liability. There are times when this is a viable option. If the business is small, you won’t be walking away from much value and if the rent is on a month-to-month basis, and if there isn’t much other debt, you could walk away and take your chances. You should remove your name from banking and credit cards. You can freeze all existing credit cards as well.
The Legal Options
Another possibility is to ask the court to dissolve the partnership. If your partner does not contest, it will run a bit like a divorce. Asetts and debts are divided and the court orders the business dissolved. This can be expensive and I believe that everything is better when handled by agreement. But if the relationship with your partner has gone bad, he probably won’t agree to much.
Here Are the Steps
- Contact me or someone who has handled problem partnerships
- Dig up and review your business documents and send them to me for review
- Discuss your options and decide on a course to follow
- Introduce me to your partner so we can get this worked out
You can get out of a bad partnership but you cannot run away from debts and other responsibility.
Be very careful of what you say to your partner. Don’t say things in anger that could harm your position. If it ends up in court, you want to be clearly identified as the reasonable partner.
There is another possibility. If your partner has broken laws, harmed the business intentionally, threatened you, or taken any extraordinary actions against you, you may have a case to have your partner tossed out of the business. This is a rare circustance so please get proper advice before considering such an action.
Chris Reich, TeachU
“If you expect compensation for your shares, that will have to be agreed to by your partner. Then, you’ll need creditors to sign off on a release from liability for you. For example, both partners are jointly and severably (usually) responsible for the lease.”
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.
Unless you are in some sort of political business, you should keep politics out of your establishment completely. Of course, you have freedom of speech, but we are in very contentious times and displays of political or religious positions might be off-putting to to your customers.
Even when people get along well, having one partner’s relative handling the books just isn’t good policy. There is an inherent conflict of interest.