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Business Divorce

Business Divorce

  • April 11, 2017

Like a marriage, before you enter a “business” partnership, you should be aware of the possibility of a “business divorce”. There are several reasons people start a business with a partner, including access to more funding, blending of talent and resources, etc. At times, partnerships are started among friends and/or family with the belief that the relationship is strong and the partner(s) can be trusted.

But what happens when you and your business partner(s) disagree? Or your business partner dies or retires?  What if one of you “wants out”? What happens with the seed money? How do you figure out the current value for a potential buy-out? How is that value determined?  How can the business be “dissolved” or terminated?

Here’s what you need to know beforehand to protect your business from this potential outcome.

There are several types of “business organizations” available to you: partnerships, corporations, limited liability companies, etc.  Each can have different legal and tax consequences to you and your partner(s).  The type of business organization you chose governs the type of agreements you need to put in place.  There are “forms” for such agreements and corporate requirements available by online services; however, those forms and agreements, even those prepared by many lawyers, are not complete or tailored to fit your needs.

At times, businesses are started in someone’s basement or with a contract on the back of a napkin with the intention of going back and filling out the paper work, but it may never happen. We strongly advise that you set up your business entity by using experienced business attorneys, like Stenger, Glass, Hagstrom, Lindars & Iuele LLP, to make sure your interests are thought-out and protected correctly in the beginning to avoid potential catastrophe’s down the road. You can refer to our past blog on tips to starting a business in New York for more information on what type of business structure is right for you.

At Stenger, Glass, Hagstrom, Lindars & Iuele LLP, we also handle litigated business divorces (e.g., when the proper documents have not been well thought-out, or not put in place at all, or when the relationship between partners has broken down completely). A recent Stenger, Glass, Hagstrom, Lindars & Iuele LLP case concerned two brothers who formed a 50/50 partnership (and later, an LLC) to own and operate a two-faceted business. Upon the discovery of one brother’s alleged theft of corporate funds and business opportunities, the other brother (represented by Stenger, Glass, Hagstrom, Lindars & Iuele LLP) sought to recover the diverted corporate funds and judicially dissolve the LLC.  The case was particularly unique and difficult because the brothers did not have a written operating agreement for the LLC. Stenger, Glass, Hagstrom, Lindars & Iuele LLP succeeded in judicially dissolving the LLC and compelling the judicial sale of the commercial premises over the objection of the offending brother. This case was picked up for publication in an industry “business divorce” blog. Access it here.

In a subsequently filed case, Stenger, Glass, Hagstrom, Lindars & Iuele LLP had the offending brother and his side-business judicially ejected from the business premises prior to its sale.

If you are looking to start a business in New York as a sole proprietor, partnership, limited liability company or corporate entity, contact us today to protect yourself in the future.  If you find yourself in or heading towards a dispute or “business divorce”, Stenger, Glass, Hagstrom, Lindars & Iuele LLP can help protect with that as well.

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