The Honeymoon Stage: Business Divorce Last Thing On Partners Minds.
It’s easy to imagine that most business partners are focused on the new business and how they will work together effectively to make money. The last thing on their minds is a business divorce. Thus, a bare bones general partnership agreement typically doesn’t spell out in enforceable legal language what happens when some or all of the partners want to get a business divorce, that is- part company.
A bare bones general partnership agreement is common for general partnerships. New business partners are highly motivated to move forward with the business venture, and in a high state of trust. Thus, business partners often agree orally (not in writing) to form a partnership or grab a written but very short bare bones general partnership agreement available on the internet or from independent stationery stores.
This blog series includes three parts:
Part I: An introduction to how general business partners with a bare bones general partnership agreement can get a “business divorce” and move onto their separate ways.
Part II: Seven (7) key concepts business partners must keep in mind before a business divorce.
Part III: How dissociation of the general business partnership involves a choice between two, often conflicting goals of business partners in a business divorce.
Bare Bones General Partnership Agreements Are Easy to Enter into but Breaking Up (aka a Business Divorce) May Be Hard to Do
The oldest and the least complicated way for two or more people to do business together is the “general partnership”. Let me qualify that statement by a short digression and a modest attempt at humor.
Consider a husband and wife doing business as a “sole proprietorship”. Isn’t that even simpler than a general partnership? Two people are doing business together. However, adding in the marriage requirement to qualify as this two-person “sole proprietorship” arguably creates the most complex way of doing business! Some married couples handle this with ease. Others do not. The foregoing is both a digression and a foreshadowing of the complexities of doing business as a general partnership.
We know from modern divorce rates that functioning partnerships can be difficult to sustain over time. Similar to marriages, no matter how carefully people select their business partners, sometimes one or more of the partners choose a business divorce.
With A Bare Bones General Partnership Agreement, Business Divorce Agreements are Desirable and Unavoidable
With marriage and divorce, there is a “marriage contract”, possibly preceded by a “pre-nuptial agreement”, followed by a marital property settlement agreement with the divorce. So too in the case of a general partnership breakup (aka a business divorce) there are agreements to be negotiated along the way.
Ideally there are agreements sooner rather than later. Why “ideally”? Because agreements avoid full blown litigation over the business divorce. Significantly, business divorce agreements can and should “trump” the prior bare bones partnership agreement to reflect the current realities of the total situation and to accomplish the mutual advantage of the soon to be former partners. At this stage in the relationship, business partners share common goals- to break up with the least pain, expense and with the maximum mutual gains.
Freedom of Contract Means Amending Prior Agreements
This is one of the great beauties of the “freedom of contract” we enjoy in this country: We can negotiate and enter into agreements (contracts), setting the terms of our relationship and setting the terms of how to end that relationship.
The freedom to make a contract includes the freedom to amend or terminate a contract previously entered into by the now divorcing parties/partners. Of course, this requires a new agreement between the parties to the old bare bones general partnership agreement.
So, in a simple case of two partners who entered into a general partnership by making an oral bare bones general partnership agreement or a simple internet written agreement, they can agree to end their partnership and on what terms.
It’s possible for business partners to agree to some other way of handling the end of their partnership relationship even if the general partnership agreement is in writing and possibly is even long and complicated. That is the beauty of the freedom of contract. They make a deal.
Two Questions All Partners Should Consider Prior to the Business Divorce
Question 1: Should the partners simply close the business and sell off whatever assets can be sold, such as inventory, the business name, a lease that has value, etc.? This would be a “liquidation”.
Question 2: Alternatively, do the partners sell the business as a functioning business to one of the partners or to an unrelated third party who will carry on operating the business? This would be the sale of the business as a “going concern”.
Solutions for Divorcing Business Partners in Conflict
As is often the case when marriage partners get a divorce, there frequently are hurt feelings and animosity between the partners. This holds true for business partners also. Sometimes the ill-will has reached such intensity that just talking between partner(s) is too difficult. How can business partners who are splitting up reach agreement during a business divorce?
Mediation is often the preferred choice for general partners. Potential mediators are: a mutual friend, a respected elder in an extended family, a member of their church’s clergy, or a professional mediator. As a professional mediator, I am biased to be sure. But I often say that you get what you pay for. Meaning: If you don’t pay for a professional mediation, you might not achieve resolution. Well trained and skilled mediators use various techniques to open up dialogue, encourage empathy between disputants and aim to help the parties find solutions that they both can live with, hopefully with the relationships in tact.
Nevertheless, attorneys representing the separate individual business partners often use the same techniques as do mediators, making them a valuable alternative to mediation. Experienced, competent attorneys help their respective clients “get to yes” as opposed to waging World War III during a business divorce.
3. Uniform Partnership Act to the Rescue in Absence of Agreement by the Parties
Believe it or not, the law helpfully provides a framework for partnership business divorce in the absence of agreement by the parties.
Business partners considering a business divorce will find the framework in the California Uniform Partnership Act (“UPA”), at Title 2, Chapter 5 of the California Corporations Code well worth reading:
Chapter 5. Uniform Partnership Act of 1994
Article 1. General Provisions
Article 2. Nature of Partnership
Article 3. Relations of Partners to Persons Dealing with Partnership
Article 4. Relations of Partners to Each Other and to Partnership
Article 5. Transferees and Creditors of Partner
Article 6. Partner’s Dissociation
Article 7. Partner’s Dissociation when Business Not Wound up
Article 8. Winding up Partnership Business
Article 9. Conversions and Mergers
Article 10. Limited Liability Partnerships
For purposes of this blog, Articles 6, 7 and 8 are most relevant. You may choose to explore the actual legal text of these articles by clicking on the links above. Alternatively, log in next week for Part II of this blog series. I will discuss seven key concepts business partners must keep in mind during a business divorce.
This Blog/Web Site is made available by the Law Office of Chuck Farrar for educational purposes only as well as to give you general information and a general understanding of the law in California, not to provide specific legal advice. By using this blog site you understand that there is no attorney client relationship between you and the The Law Office of Chuck Farrar. The Blog/Web Site should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.