Business Dissolution–Severing Ties Without Fighting to the Death
Sometimes a relationship doesn’t work anymore. When we talk about divorce, it typically involves ending a marriage. We’ve all heard of contentious divorces. But a divorce also can be civilized and consist of a dispassionate division of assets.
Marriages aren’t the only legal relationships where parties may need to go their separate ways. The relationship between an orchestra and its conductor or music director can seem like a marriage of musical visions. With time, the relationship may sour or simply run its course, or another “suitor” may entice a director to move on.
Some conductor-symphony partings end amicably. For instance, Robert Spano, long-time conductor of the Atlanta Symphony, announced he would leave at the end of the 2020-2021 season because he feels it is time for something new–both for him and for the orchestra Other times, there can be a culture of dissention where the parties must part ways, as happened with the Pasadena Symphony in 2010. Finally, just as in an interpersonal relationship, there can be allegations of misconduct, like that which accompanied departure of long-time Metropolitan Opera conductor James Levine.
Business relationships similarly can need “divorces.” As with orchestras, this may occur for several reasons. There can be misconduct by a partner or a falling out among partners. Other times, an owner may want to retire, or the business model may no longer make sense.
This article focuses on how business partners might go their separate ways after a disagreement.
Business Divorces
Sometimes married partners divorce, they are cordial, even friendly, and they can agree upon everything. Other times, they are bittersweet, and sometimes, they are contentious. Business “divorces” similarly run the gamut between friendly to hostile.
When married couples divorce, a Court must be involved at some point, even if it is just to approve the parties’ written agreement. Although some business “divorces” may end up in Court, most occur in private without Court involvement.
Pre-Planned Divorce
Married couples rarely plan their divorce when they get married. However, a business “divorce” can be planned and agreed upon in advance.
If the business is owned in a limited liability company (LLC), state law usually allows the LLC members to agree in the LLC’s operating agreement when the LLC will end. The members might agree to end the LLC on a certain date or upon occurrence of a specific event. For instance, an LLC formed for the sole purpose of owning a particular real estate investment might end a set period of time after the real estate is sold.
Similar to agreeing on a property division upon the divorce of a married couple, the LLC’s operating agreement also can describe how the business assets will be distributed and who will be in charge of winding up the business’ affairs. State laws frequently include “gap filler” provisions, which will apply if the operating agreement doesn’t address winding up.
Partnerships, similarly, can have an agree that the partnership will end on a specific date or occurrence.
When corporations are formed, most states ask how long the corporation will ask. Most people select “perpetual duration,” but that isn’t required. The incorporator can select a specific termination date instead.
While preplanning the end of a business in advance might seem like a good idea, few businesses do this, because of one big drawback. None of us can see the future. If something changes and it’s not feasible for the business to end then, the owners will need to revise the business’ formation documents to extend that date.
Dissolution Agreements
Frequently, married couples who divorce eventually agree on the terms of the divorce. When this happens, they sign a separation agreement or dissolution agreement. That agreement becomes the basis for the divorce decree.
Business owners, also, can end their business by signing a dissolution agreement that describes the rights and responsibilities in completing the dissolution. A dissolution agreement might include:
· How property will be divided;
· Who will be responsible for the dissolution;
· When the dissolution will occur;
· Who will be responsible for the business’ records after the its dissolution;
· What will happen if it turns out that the business owes back taxes or has overlooked debts; and
· Mutual releases of claims.
Like the dissolution of a marriage, the dissolution of a business will require that the end of the business be put in government records. That involves filing cancellation or dissolution paperwork, usually with the Secretary of State.
Judicial Dissolution
When most people think of divorce, situations where marital partners can’t agree to anything come to mind. When that happens, the couple ends up in a contentious court case, which can be time-consuming and costly. If the divorce is contested, the partner who wants the divorce will need to show legal grounds for ending the marriage, and a judge will decide whether a divorce should occur. If the divorce is granted, the judge’s order will determine property division, alimony, parenting rights, and child support.
When business partners can’t agree on dissolution terms, the matter may end up in Court. The lawsuit may be for breach of the LLC or partnership agreement, with a request for dissolution as a remedy. Or, it could be an action specifically for judicial dissolution.
Most states limit courts’ authority to grant judicial dissolution to specific circumstances. This varies from state-to-state and may vary depending upon whether the business is a corporation or a LLC, but some grounds include:
· It is not reasonably practicable to continue the business;
· The owners cannot agree on who should run the business; or
· Fraud or other serious bad conduct by management.
Actions for judicial dissolution can be as contentious as a contested divorce. Business owners and management may disagree whether the business should be dissolved. Or, they may disagree there has been misconduct. Or, they may disagree how the business’ assets should be distributed. A judge will decide these issues in a decree for judicial dissolution.
Governmental Dissolution
In a marriage, one or both partners may neglect their marital obligations. They may even live separate lives in different households. However, that doesn’t mean they are divorced.
The same is not true for businesses. If business owners neglect to file the reports and pay the fees required to keep the business in good standing, the business may be administratively dissolved by the government.
Finally, in rare situations a marriage may be annulled. This might happen if one spouse was already married or the marriage was obtained through fraud. Likewise, under rare circumstances, the state may dissolve a business if it was formed for fraudulent purposes.
Other Options
The business owners can leave the business without ending it. Those alternatives are beyond the scope of this article, but I discussed a number in Knowing When to Leave Your Business Behind.
Whether and how to end a business is not just a legal matter. The decision as unique as the business itself. Business owners considering ending their business relationship should engage legal counsel. Where the owners do not agree on 100% of the issues, each owner must have a different attorney. That/those attorney(s) can help the owners find the best solution for them and their business.
© 2019 by Elizabeth A. Whitman
Any references clients and their legal situations have been modified to protect client confidentiality
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