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BLOG: Aren’t We Just Business Partners? Then Why Does It Feel Like I Am Getting a Divorce?

Posted on Tuesday, April 21, 2015 at 8:59 AM by Brad Holbrook

The recent news from New York includes word of a woman that was charged with marrying 10 different men, without ever divorcing some or all of the lucky suitors, in what is believed to be an immigration scam.  How does it feel to be married to 10 people at the same time?  Well, if you are involved in any business venture other than as a sole proprietor, when the music stops, you may find yourself feeling like you have multiple spouses and with divorce imminent. 

Although there are many kinds of business entities that one can select when entering into a business relationship with other individuals, the statutes governing all business entities give one the ability to have all internal governance controlled by agreement.  For example: 

  • Corporations can be controlled by virtue of buy-sell agreements and/or stock voting agreements to govern the rights and duties of its shareholders;
  • Partnerships (whether general, limited or limited liability) are controlled by partnership agreements between the partners; and,
  • Limited Liability Companies (“LLCs”) are controlled by operating agreements between the members. 

Avoid unrealistic expectations when forming an entity for purposes of operating a business as a going concern.Just like newlyweds, sometimes the excitement of a new adventure causes one to imagine only a world of green grass, butterflies and puppy dog kisses.Some fail to think about the dark issues of getting in business together:

  • What if this business concept turns out to be a dud?
  • What if the business needs more money to get up and running?
  • How about capital needs for more R & D, a new business line or a new model?
  • What if the other individuals become people I just cannot work with anymore?
  • What happens if someone gets sick, becomes disabled, or dies? 

The questions one should ask when going into a business relationship, although not the identical issues faced by people who trot down the marriage aisle, are so similar that if you fail to stop and ask these hard questions, and do some advance planning, you may find yourself in a “business divorce” with few options if things don’t work out as you had hoped.

So, is there a sure-fire way to avoid getting divorced from your business associates?  The answer is no.   However, just like entering into a marriage in which parties plan and sometimes enter into pre-marital agreements to help alleviate the uncertainty, time and expense of divorce litigation, you and your attorney can plan for the future unknowns in business. 

Remember those internal governing documents in corporations, partnerships and LLCs?  Although not all issues may be capable of being drafted-away, most areas can be effectively addressed by agreement at inception of the business relationship.  When a partner, member or shareholder decides he or she would like to retire, you can effectively plan what is to happen relative to whether the business entity is obligated to purchase the leaving business owner’s interest in the business, or merely has the option to do so.  You should know how to value the business interest, whether the purchase of the business interest must be immediately paid or can be paid over a period of time.  Even dissolution of the entity, if no one wants to continue to operate the business as a going concern upon certain events, can be planned in advance in such a way that it can make the cessation of business all the more palatable.

While the situations for which you can plan are endless, depending merely upon having the right discussion at inception, we increasingly find ourselves litigating for our clients about issues that impact the continued viability of a business as a going concern.  Unfortunately, a common theme that emerges during our work for our clients in these cases is that the triggering event, whether it is voluntary retirement or needing to expel a business owner for questionable business or personal practices (e.g., expulsion “for good cause”), the broad and general entity document doesn’t help us answer the question of “what do we do next?”  As such, the parties begin their divorce process with multiple attorneys arguing for and against the competing positions with no clear rules that a judge and/or a jury can use to decide those intimate issues that exist between departing business owners:  Who will get to continue to call on the customers?  Who continues to have access to third party vendor contracts? Who gets to continue the operations? Who gets to keep the company website, logo and marketing materials?

If you think that these decisions are easily made in the heat of a divorce, with calm and rational thought, economy of cost and timing, and without any ulterior motives, then you clearly have never been married to 10 people before.  

Posted in: Business, Litigation
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