When you go into business with someone, you don’t expect the partnership to deteriorate. But as with any relationship, business partnerships can become contentious due to differences in opinion, breakdowns in communication, unequal workloads, and financial disagreements. When disputes cannot be resolved, you might consider whether you should part ways — or dissolve the company entirely. Importantly, there are several steps to separate from a business partner legally in New York.
Review the Partnership Agreement
The first thing you should do if you’re thinking about separating from your business partner is review the partnership agreement. This document should outline the steps required to separate. It may also include a clause concerning reasons for the removal or expulsion of a partner, such as:
- Misconduct
- Breach of fiduciary duty
- Unequal contributions
- Insolvency
- Retirement
- Incapacity
In addition, the partnership agreement may specify the terms under which partners can exit, the procedures that should be taken for asset distribution, and whether the remaining partners have a right to a buyout.
Have an Open Discussion with Your Partner
Having an open and honest discussion with your business partner is crucial if you are thinking about separating from them. If possible, explore potential solutions and try to reach a mutual agreement without resorting to litigation. Mediation can help partners communicate and end things amicably without court intervention.
Consider a Buyout
If partners have different goals for the future of the company, buying the partner out may be a good option. This can eliminate all ties between the partners while allowing the business to continue its operations without disruption. You might also consider selling your stake in the business to your partner or another individual. A buyout agreement should be carefully prepared by an attorney to ensure your rights are adequately protected.
Draft a Separation Agreement
Typically, a partnership will dissolve when one partner wishes to leave. If your business partners want to continue the partnership after you depart, a forced dissolution can be prevented with a separation agreement. This document should outline the terms of the separation and require that your name be removed from any contracts and liabilities.
Other matters that should be addressed in a partnership separation agreement can include:
- A description of how assets will be distributed
- Responsibility for debts
- Treatment of any contractual obligations
- Buyout terms (if applicable)
- A mutual release of liability
A separation agreement may also contain non-compete and non-solicitation clauses. It’s essential to have the representation of an attorney who can safeguard your interests when negotiating this agreement.
Proceed with the Dissolution Process
If the partnership will be dissolved, there are specific legal steps that must be followed during the wind-up process. Failure to terminate the company’s legal existence could result in the business continuing as a legal entity — even if it is no longer operating. This means you could be held personally liable for the company’s debts.
Wind-up involves notifying creditors and stakeholders, settling any outstanding financial obligations, distributing assets, closing accounts, and filing taxes. Significantly, all partners are jointly responsible for the debts of the partnership and would be responsible for coming up with the payment if the partnership cannot cover its obligations.
Contact an Experienced New York Business Attorney
If you wish to separate from a business partner, a knowledgeable business attorney can guide you through the process and help ensure the proper legal procedures are followed. At Barnes & Barnes, P.C., we offer high quality legal services and reliable counsel for a wide range of business matters, including those involving partnerships. Contact us at (516) 673-0674 to schedule a consultation.
