August 31, 2018

Breaking Up is Hard to Do: How to Prepare for the Break-Up of a Business

by Courtney Hanna, Joseph & Joseph Co. LPA

When starting a new relationship, whether it be a personal or business relationship, one never wants to think about the possibility of it ending.

However, when starting a business, it is important to determine not only how the business is going to run when things are going smoothly, but also how the business continues to run if a principal wants out, passes away, is not pulling their weight or if it is time to pass the business down to the next generation.

When a business is set up, we advise our clients to enter into an agreement which will provide the roadmap for these situations. The type of entity, whether it is a corporation, limited liability company or partnership, will determine the form and name for such agreement. In a limited liability company it is called an Operating Agreement, a contract between the principals, and it provides, among other things, the capital contributions of the parties, the allocation of profits and liabilities between the parties, the roles each party will play in the business and the authority each of them has to make decisions. It can even provide for how the determination of the value of a principal’s share should be calculated in the event that principal leaves or passes away, the actions of a principal that would call for their resignation or termination or even the designation of how or to whom the business will be sold or passed on. The signing of the Operating Agreement should be done when the business is set up, when the principals are getting along and when they are thinking clearly about their intent for the business.

Finally, we would advise that all persons entering into a business have a good lawyer and accountant to help them through this process and to be able to explain the possible pitfalls of entering into such a relationship, as accounted for in the Operating Agreement.