What is a Business Divorce?

While “divorce” typically makes people think of separations stemming from marital conflict, the concept of a “business divorce” is appearing more frequently in legal circles. A business divorce is the legal separation—whether negotiated or litigated—of the owners of a privately held commercial entity. Numerous factors can contribute to the need for a business divorce. While no one enters into a business relationship expecting to have to separate, business partners sometimes are unable to effectively work together, and the business suffers as a result. It is important to recognize when a business divorce may be necessary to protect yours and the business’s best interests. These separations occur in all types of business entities—corporations, limited liability companies, and partnerships. The process for extricating yourself from your business partners can be highly complex and involves many financial and legal elements that have serious implications.

Reasons for a Business Divorce

Business divorces can stem from a variety of contributing factors, including:

• A partner in the business is going through a personal crisis which may include a marital divorce, serious injury or hospitalization, birth of a child, or death.

• Disagreements among partners over the direction of the business.

• Disagreements with shareholders that are irreconcilable.

• A partner may choose to retire or elect to pursue other interests which can lead to a mutual separation if leadership agrees to their separation from the business.

• When one business partner neglects his duties and puts an undue burden on other partners, those partners may need to remove that partner from the entity.

• If one of more partners is suspected of fraudulent or unlawful behavior, litigation and separation from the business may be necessary.

• When a partner declares bankruptcy, the business can be put into jeopardy and removing that partner or yourself from the business may be prudent.

Essentially, if the business is not able to continue functioning without significant disruption because of a continuing partner conflict, the parties involved should contact a partnership dispute lawyer and discuss options for a business divorce. Having experienced legal representation to represent you is critical to managing these situations. Significant business changes must be handled with the utmost care and attention to detail, as a divorce can fundamentally alter a business’s identity and structure. A qualified business litigation lawyer can guide you through this process, address relevant filings with government entities, and address any conflicts that may arise among those involved.

Elements to Consider When Managing a Business Divorce

Operating Agreements, Bylaws, and Employment Agreements

As with most businesses, the parties involved may have written agreements that govern their relationships and often their employment. Often these are form agreements that were signed when the business was created with little thought given to ultimate separation. These agreements typically specify details of work division between the business partners, shareholders, or members, and may determine what benefits they are entitled to receive. The terms of the these agreements have to be considered in any separation.

Drafting and Negotiating the Terms

In most cases, the business continues to operate after one or more owners leaves a business entity. The remaining owners—partners, members, or shareholders—may want to create new agreements that address the issues leading to conflicts that caused the separation or just define their roles more clearly. There are almost always separation agreements with the departing owner that involve some sort of buyout or sale of assets and ownership interests. All terms and issues must be considered and addressed for a business divorce to successfully proceed.

Regulatory Compliance

When a company operates within certain industries, like healthcare or oil and gas, there may be specific regulatory and notification requirements the business must fulfill when undergoing a separation.

Forensic Accounting

If a partner suspects one or more other business partners are potentially involved in fraudulent or unlawful actions, the business may need to conduct a thorough examination of the business financial records to protect yourself and insure the separation is a fair financial arrangement. This may be a difficult step to take, but an experienced legal team can guide the way.

Ownership of Business Assets

A business often owns valuable assets like trade secrets and intellectual property created to improve business operations. Sometimes the assets are real property, machines and equipment, or even customer lists. Developing agreements that establish who owns what assets after the separation is an important part of the business divorce process.

Business and Asset Valuation

Valuing the business is often necessary to determine how to proceed with a separation. A business partner who is departing the entity may be entitled to some of the business’s value that they contributed to creating. An experienced attorney will have a history of working with professional appraisers and business valuation consultants to determine the fair market value of the business and the assets involved. When a business divorce begins, you need advocates who will ensure you capture your fair share of the business’s value.

Taxes

A business divorce may have significant tax implications for the business and its partners when assets are sole or transferred and if the business is dissolved outright. Experienced attorneys will help spot potential tax problems and involve accounting professionals so that you can manage tax liabilities resulting from the business divorce.

Outstanding Litigation or Agreements

If the business is in the middle of current litigation involving the separating partner, , this must be addressed and resolved before any business separation can be final.

Minority Shareholders

Whether the separation is voluntary or involuntary, an experienced business attorney will carefully to address any minority shareholder rights to avoid complications or future litigation.

Business Divorce Attorneys

Ultimately, the Houston business business attorneys of Burford Perry LLP are prepared to litigate any issues that arise from the separation process. We have extensive knowledge of business and employment law that will help make sure all potential obstacles are addressed to ensure the transition is as smooth as possible.