Business Divorce: How to Break Up with Your Business Partner Without Destroying the Business – Part III

by Navigant Law Group | Business, Business Law, Mergers & Acquisition, Succession Planning

Alternatives to Breaking Up

Unlike the prior two articles in this series which talk about how to identify when it is time to break up with your business partner and how to break up without destroying the business, this article will talk about the alternatives to breaking-up that exist.

While this article refers to “partners” and “partnerships”, these are umbrella terms being used so that we do not have refer to all the various entity types repeatedly; the recommendations in this article can be applied to all of various entity types (LLC, corporations, partnerships, etc.).

Uneven Contribution/Compensation

As a lot of business break ups are motivated by the fact that one partner is not contributing as much as the others (or as much as they used to). In these types of situations, changes can made to the way that the business is run (and the way the partners are compensated) to make things “even” again.

Adjust Compensation to Match Involvement

Instead of breaking up, a partner can take a less active role in the business, whether this means that the other partner(s) is going to take on more work or that the business is going to hire an outsider to do some (or all) of the work previously doing by the now-less active partner. Of course, if a partner is now less active, this means that the compensation they receive from the business has to be modified to match their new activity level (or adjusted to pay for expenses related to the decrease in activity – such as the salary of the outsider now doing the less-active partner’s tasks). On the flip side, if a partner is taking on more work, their compensation also needs to be adjusted to reflect their new activity level.

However, if compensation in your entity is based solely on ownership (and not on involvement), a different solution may need to be created for your situation in which the less active partner either agrees to modify the way compensation is distributed or agrees to transfer some of their ownership interest to the now-more active partner.

Add a New Partner

Often instead of hiring an outsider to take on the duties previously done by the less-active parent, some partnerships choose to add a new person as an owner instead. There are various reasons for adding a new owner instead of hiring an outsider to perform important or sensitive tasks and there are various ways to do so.

Driven by A Need For A Change

Sometimes a breakup is motivated by the need for the entity to change the way that the business is run or the services/products that the business offers. In these situations, changes can be made that allow the business (or parts of it) to continue.

Arrange A Buy-Out or Redemptions

Often a new person is found, not to add the partnership, but to replace one of the current partners. With the new partner may come new ideas, new skills, or the ability to take the business in a different direction before.

Sometimes the transition between the old and new partners can happen all at once, the new person coming in at the same time that the old partner leaves or the transition can happen more gradually, the leaving partner slowly transferring ownership over to the new partner.

On the flip side, sometimes a partner may just want to buy out the less-active partner, instead of adding a new partner to the partnership or hiring someone to cover the duties no longer being performed by the less active partner. Once the buyout is complete, the remaining partner can then decide if they want to hire someone to handle the tasks performed by the old partner or if they want to get a new partner.

In this type of situation, the business can continue on, just like it always has, despite the fact that a change of ownership has occurred.

Spin-offs & Restructuring

Often a business will have several different divisions or different categories of products/services that it offers. In such a situation, it is often possible to separate out one (or more) of these divisions or categories and make them into their own separate entity. This new entity can be related to the prior entity (i.e., a subsidiary, etc.) or it can be its own separate and distinct business (not related at all).

These situations are often called spin-off by the media as the new entity is seen as been spun off of the older entity.

Regardless of the situation, documentation can be drafted which explains the actions being taken and the intended effect of such actions.

If A Business Break Up Is Unavoidable

Dissolution

The above options all require the business to continue on as an active entity. Sometimes this is not the case and the partners really just want to spilt everything up and then go their separate ways.

In Illinois, the process in which a business officially ends is called dissolution and a terminated business is known as a dissolved business (a dissolved corporation or a dissolved LLC).  An entity can either voluntarily dissolve (voluntary dissolution) or it can be involuntarily dissolved (involuntary dissolution).

If the partners are able to agree that the business need to be dissolved, the entity can file documentation with the Illinois Secretary of State announcing the dissolution. There are certain steps that need to be taken prior to dissolution; this process if known as “winding -up” and places certain requirements upon the owners with regards to the treatment of the assets (including the cash) of the entity. However, during this process, the partners can negotiate between themselves regarding how certain important assets are going to be treated (i.e., intellectual property) to allow opportunities for future endeavors by the partners (on their own or together).

However, if the partners are unable to agree on how the assets should be treated or if the entity should be dissolved at all, it may be necessary to get the court involved.

Judicial Intervention

All of the options above only work if the parties are able to work together towards a solution. Unfortunately, this is not always the case; there are some situations in which judicial intervention is necessary. If parties are unable to communicate (at all) or unable to reach an agree on how to move forward, it may be necessary to request that the court get involved and help resolve the situation.  Under Illinois law, the courts can order that:

  • The purchase by the entity of the ownership held by any partner(s);
  • That one partner be allowed to purchase the ownership held by another partner for an amount set by the court; or
  • That the entity be dissolved and that its assets be used to pay any outstanding debts of the entity (before being disbursed to the partners)

At the end of the day, only you can decide if it is time to break-up with your business partner or not. Due to the potential impact of business break-up, it is not a decision that should be made taken lightly or made quickly. Should you have any questions about potentially ending a business relationship or alternatives to ending a business relationship, or would like to schedule a free initial consultation, please contact Navigant Law Group, LLC at (847) 253-8800 or contact us online.

Navigant Law Group, LLC is a full-service law firm with various areas of service to assist your business, including: Employment Law, Intellectual Property, Commercial Real Estate, Litigation, and general Business Law services. Individual services include Estate Planning, Wills and Trusts, Probate, and Guardianship.

This article constitutes attorney advertising. The material is for informational purposes only and does not constitute legal advice.