Running a small business is a complicated endeavor, and it can complicate otherwise healthy personal (or even professional) relationships. If you’re in a partnership with someone and it’s not working out, it’s important to take the right steps to ensure your business and financial future are safe.
If you decide you want to move on with your business without input from your partner, it’s important to work directly with an attorney to determine the best course of action. Each business situation and partnership is different, and you want to have all your ducks in a row before you confront your business partner about your plans. It’s also important to understand that if you don’t have predetermined exit strategies or dissolution plans, firing your business partner is likely going to be expensive and potentially difficult.
If you’ve decided you want to move on with your business on your own, it’s important to understand the legal and professional implications and processes before you move forward.
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Build in legal mechanisms at the outset of your business
If you’re entering a partnership or starting a business with other individuals, you need to work with a lawyer to set up your business properly. By defining ownership stakes, exit strategies and day-to-day responsibilities, you can eliminate any potential issues where many problems arise. Walter Gumersell, a partner with Rivkin Raddler, said general partnership law is not deeply defined in many states and can involve statutes that are only “six pages.” This can create a lot of gray area.
“There’s a lot of gaps to fill,” he said. “You don’t want a court filling the gaps.”
By sitting down at the outset of your business and establishing legal parameters, you can save time and money in the long run. While establishing ownerships stakes is vitally important, there are a couple exit plans that are worth understanding.
Many companies, private or public, will set up vesting options for business partners. These agreements usually say that partners “earn” their ownership in the company as they work on the business. This usually means that a partner who owns, say, 20% of a business will have those shares in the company vested over a period of four years. There are many scenarios for vesting options that include cliff periods, which is usually an initial blackout period where no shares are vested and if a partner leaves, he or she is entitled to nothing.
Vesting options can be an ideal setup for some partnerships as it incentivizes partners to be present in the business for a designated time period. It also provides a road map should a partner decide to leave or if a partner is fired by the others.
Other exit plans that can be set up at the outset of the business involve buyout terms and structures. By establishing a buyout price and terms at the beginning of the business, you can avoid any legal headaches down the line.
Gumersell said oftentimes minority partnership owners (49% and below) can negotiate for discounted buyout terms. According to Gumersell, another exit plan is what’s known as a shotgun buyout, where one partner puts a buyout offer on the table and the other partner(s) can either accept that offer or match it to buy out the original partner.
There are several options for small business owners that can eliminate the need for expensive court proceedings and other financial and emotional strain. [Interested in business plan software? Check out our reviews and best picks.]
If you have no formal agreements, consider dissolving your business
General partnerships and handshake agreements with no predefined exit plans can be very complicated. There are two scenarios worth exploring: 50/50 partnerships and majority/minority partnerships. In a 50/50 partnership, if you want to “fire” your co-founder or partner, Gumersell said it may be worth dissolving your business entirely.
With no predefined legal structure, your partner owns 50% of the business. That means you can either negotiate a buyout, if that co-founder is willing to sell you his or her share of the business, or you can dissolve the business. In most states, you don’t need to get your partner’s approval to dissolve the business in a 50/50 agreement.
By dissolving the business, all your assets will be liquidated, your creditors will be paid, and then you’ll be able to keep your share of what remains. Gumersell said that if there are trademarks, both partners still have a right to use that name, so if you plan on reopening the same business under the same name on your own, be aware that you partner could technically do the same. [Need help deciding the best legal structure for your business? Check out our sister site, BusinessNewsDaily.]
In majority/minority partnerships, you’ll have to buy out your partner – you can’t take away someone’s property, even if you own over 51% of the business.
Deciding to fire someone is never easy
Firing a co-founder or trying to take full control of your business can be a stressful decision. It’s important to work with lawyers and mediators to make it through the process in the best possible position. By having a third party, especially a mediator, to help you and your partners work through the details, you can keep things professional and not personal.
The fact remains, however, that if you’re going to start a business, you need to set up a proper legal structure for it first, and that means establishing exit plans.
“The expense of trying to get to a dissolution, whether a corporation or partnership, will be five times to 10 times more than what it would be to sit down at a table to iron this out at the beginning,” said Gumersell.