MY PARTNER WANTS TO LEAVE – NOW WHAT?
MY PARTNER WANTS TO LEAVE – NOW WHAT?
After 15 years, you reconnect with your old college roommate and start an organic energy bar company together. This joint venture was sweet! Your new partner’s girlfriend owns an organic farm where you two can conveniently purchase many of your ingredients. Plus, your vegan wife of 11 years is completely on board with promoting clean eating.
Like many partnerships, the business relationship started off with great momentum, good intentions and a well-laid plan. Two years into the business, you notice that your partner keeps approving invoices from his girlfriend’s farm that show an increase in the price of oats and flax seeds. In fact, your company is paying three times the market rate for those ingredients. You’ve also noticed that while you haven’t taken any money home from the business, your partner recently purchased a Tesla Model 3 even though he doesn’t have a second stream of income.
Does this sound like the makings of a business breakup?
When a business partnership begins to spiral downward, most business owners want to know where they stand; their options; and their next steps. Ideally, before going into business with your partner(s), you would have already considered and made provisions for what happens when a partner retires, dies, leaves, gets booted out or your company simply goes out of business. When a client finds themselves in this predicament, the first question I ask is:
What does your partnership agreement say?
Having a solid partnership agreement is the key to determining the actions you should take if an unfortunate severance occurs. A well-crafted agreement outlines the rules of engagement in the partnership relationship from the onset. It also clarifies rights and responsibilities. It even outlines the protocol for the breakup. With a concrete partnership agreement in place, the likelihood for serious consequences (including lawsuits) is greatly reduced.
Ending (Dissolving) Business Partnerships in Georgia
A written partnership agreement is legally binding and often leaves little or no room for negative actions following a partnership separation. Its purpose is to protect the interests of the business and all stakeholders in the relationship and to provide for a smooth transition should the relationship end.
Unfortunately, formal written agreements do not exist in many business relationships. So, for purposes of this section, we’re going to assume that we’re dissolving a General Partnership. Think of a General Partnership as a “partnership at-will”; you can leave for any reason, at any time.
In the absence of a written agreement, state law (also referred to as “default rules”) will govern what happens to your business during the winding up phase of your partnership’s termination. Default rules vary state-to-state. In Georgia, the Uniformed Partnership Act will dictate the terms for dissolving your business relationship, even if you and your partner(s) would have negotiated a different outcome had you set your own rules for dissolving the relationship in a formal agreement.
In Georgia, when a partnership is dissolving, there are remaining affairs that must be addressed and wound up before the partnership officially ends. Paying off outstanding debts accumulated during the business relationship and properly dividing assets are just a few of the state law requirements by which you must abide. In fact, partners are not supposed to receive cash disbursements until assets are liquidated and all debts are paid. If business debts exceed the amount of money recouped from selling assets, each partner must personally assume the partnership’s debt.
You and your partner(s) may have envisioned a different outcome for how assets, debts and disbursements should be divided and assumed. However, unless you have a written partnership agreement in place that spells out your rights and responsibilities, your respective state law will apply and dictate all of the remaining terms of your business relationship.
Formal Dissolution to End Your Liability
If remaining business affairs are not resolved before the partnership ends, each partner puts their personal assets at risks. Therefore, it doesn’t matter if you and your business partner are selling the business or you’re simply cutting ties; the partnership should be formally dissolved to ensure that your liability for partnership debts end with the business relationship. When a partnership is formally dissolved, the remaining partners can no longer bind you to business contracts, debts or deals without your permission.
Although there are a number of tasks involved when formally dissolving a partnership, here are 4 primary tasks you want to check-off to avoid future liabilities:
1. Vote – All business partners should vote to dissolve the partnership. Be sure to record your vote in writing.
2. Make Arrangements for Debt Payment – Assuming the vote to dissolve the partnership prevails, you’ll begin taking steps to wind up the business by paying off debts and distributing any remaining assets to the partners. If a written partnership agreement exists, it should contain instructions on how these matters will be resolved. Absent a formal agreement, you’ll follow your state’s default rules regarding which creditors are to be paid and in what order.
3. File Dissolution Form with the Secretary of State – Not all states require that you file a Dissolution Form with the Secretary of State; Georgia is one of those states. However, as a precautionary measure, it’s a good idea to file this form whether or not a written partnership agreement exists. This form simple states that a partner is no longer responsible for business debts.
4. Publish Notice – You should also publish notice (in your local online or print newspaper) that the business partnership has ended. When a notice of the partnership’s termination is published, it puts creditors on notice that a partner may be leaving the business with unpaid debt remaining and/or that a partner can no longer incur future debt.
When you decide to embark on a business venture with a partner (even an old college roommate from 15 years ago with connections and similar ideals), make sure you enter into that relationship with a solid, written partnership agreement. That agreement should include provisions that clearly outline how you intend for your relationship to function and operate now and into the future. Even if you’re currently in a business partnership, it’s not too late to protect the business and your personal assets by memorializing your business arrangements in a formal agreement.
Therefore, should your partner choose to leave, you won’t find yourself in a bind trying to figure out your next best steps and relying on the state to dictate your business’ future as well as your personal liabilities.
Your Thoughts: What protocols have you and your partner(s) discussed should one of you leave the business? Do you have a partnership agreement? If so, what prompted you to establish a formal agreement? If not, what are you waiting for?