Operating a business means always adapting to change and acting quickly to solve unforeseen problems..
Operating a business means always adapting to change and acting quickly to solve unforeseen problems. If your company has been operating before, during, and after the COVID-19 pandemic, then you have probably experienced this phenomenon up close; over the past three years, your company may have changed its budget, its products or services, and its primary means of communicating with customers. You are used to adapting to system-wide financial hardships, changing consumer tastes, and employees’ needs. What happens, though, if the problem is not the economy, a problem employee, or customers’ fickle tastes but one of your own business partners?
Perhaps what is bringing your business venture down is one of the people with whom you once shared a business vision. People often compare the breakup of business relationships to divorce since they both involve the disentangling of finances and since, in both cases, emotions run high regarding financial and personal betrayal. If it is time for one of your business partners to go, the process of ending the partnership will go more smoothly if you work with an Arizona business law attorney.
The Partnership Agreement Can Make Business Breakups Less Messy
Some business structures require business owners to file documents with detailed descriptions of how the business will operate. If your company is incorporated as a partnership or limited liability company (LLC), then your operating agreement most likely outlines the procedures for removing a partner and the circumstances under which these removal procedures are warranted. The following are some common reasons that businesses choose to remove partners:
- Breach of the terms of the operating agreement
- Breach of fiduciary duty (intentionally or recklessly causing the company to suffer financial losses)
- Criminal conduct not directly related to the business
- The partner has inherited his or her ownership share from a deceased partner and does not contribute any work to the operations of the business
Even if everything is spelled out in the operating agreement, you will still need a lawyer to help you follow the steps to remove the partner that is bringing your business down.
Sometimes the Business Has to Shapeshift to Ditch a Troublesome Partner
When the business owner refuses to let you buy them out and when your operating agreement does not include procedures for the involuntary removal of a partner (or if you do not have an operating agreement at all), things are somewhat more complicated. The procedures for removing a partner are easier to implement the smaller the partner’s ownership share is. If the troublesome partner owns 50% and you and another minority partner own 25% each, the easiest way to get out of the partnership is to dissolve the company altogether. Once the process of dissolving the company is complete, the partners who still want to work together then form a new business, which they can fund with the capital they received when the old company dissolved.
Squeeze-Out Mergers are a Measure of Last Resort
Most of the time, when business owners want one of their partners out of the partnership, the first way they will try to accomplish this is by offering to buy out the partner’s share. Partners who have inherited their ownership share but have no interest in their deceased relative’s line of work are often welcoming of such offers, but sometimes they insist on keeping their ownership share as a matter of principle. The same applies to partners who are obviously not acting in the company’s best interests.
Arizona, like most other states, allows for legal procedures by which you can remove a partner who refuses to go. This process is known variously as a squeeze-out merger, freeze-out merger, midnight merger, or hostile takeover. The majority owners of the business (you and other partners whose ownership shares add up to more than half of the company) go to the court and ask it to remove the troublesome partner. It is the equivalent of filing for divorce. Squeeze-out mergers can get ugly; unlike the other methods of removing a partner from a partnership, they always involve litigation. It is not always necessary to have a business lawyer by your side when you are attempting to buy out a partner’s share, but it is when you are attempting a squeeze-out merger.
Contact Singular Law Group About Removing a Business Partner
A business law attorney can help you if you are trying to remove a business partner who refuses to leave the partnership. Contact Singular Law Group PLLC in Tempe, Arizona, to set up a consultation.
