Business Breakups: How to Protect Yourself When It's Time to Split

Welcome to Your Business, Accelerated! Digitally remastered with AI, Your Business, Accelerated! is the go-to podcast for entrepreneurs ready to scale smart. Hosted by Attorney Shaune B. Arnold, it delivers strategic business insights, legal frameworks, and real-world solutions to help you operate with clarity and confidence. Get actionable guidance to protect, grow, and optimize your business…one smart move at a time.

When it’s time to call it quits with your business partner, what’s your next legal move? Attorney Shaune B. Arnold walks you through dissolving general partnerships, LLCs, and corporations. Learn how to limit liability, notify state agencies, manage assets, and protect yourself from partner misconduct before it wrecks your business—and your life. 

Transcript

Hello everyone, and welcome once again to your business accelerated. I am excited to be here. I know I say that every week, but this week, I am especially excited to be here with you.

You know, I started this podcast on just wing and a prayer …and just …faith …some time ago. I had faith that people out there would be interested in what I have to say. So, it is just really heartwarming to hear from you and know that you enjoy Your Business Accelerated and the fact that we are here to talk about the issues entrepreneurs face in business.

I also have another podcast called LegalBiz Café. Over there, we focus on your mindset as the entrepreneur. Those are the issues that make you feel like staying in bed, rather than building your business. Here, on your business accelerated, we deal with hard core issues that can break you down with uncertainty and stress. This can also impact your mindset. For that reason, you want to listen to both shows. Together, they give you the mindset training and the business training you need and that will support the growth of your business.

Before we get started today, I want to take care of some housekeeping. I always like to highlight that I'm a California business attorney. A lot of you live in different states. A lot of you live in different countries. If that is so, and if we discuss legal issues on your business accelerated, I want you to take what I tell you to an attorney in the jurisdiction where you live, so that you can determine whether that information is the same where you live as it is where I live.

Tonight, we are talking about divorce – but not between married couples. We are discussing divorces in business. Some of the issues are surprisingly similar when you want to divorce your business partner.

First of all, if you are in a classic partnership, let me yell at you for just a moment. I always recommend to never get into a general partnerships. Never. Never ever. I don’t think I’m being clear. Don’t enter into a general partnership, ever. This is because there is no limited liability protection in a general partnership, not against your partner and not against your customer.

This means if your partner is out in the marketplace, acting a fool, …either in the marketplace or even in their personal life, …you can be left fully liable for whatever they're doing. You could lose your house, you could lose your tools, you could lose your ability to make money, and in some rare cases, you could even lose your freedom.

So, no general partnerships. Ever. …If you do have a general partnership, I want you to dissolve it immediately and put a corporate structure around you. That's to the extent that you still want to do business with them. If you don't, then you will have to dissolve it. Talk to a lawyer where you live to help you out.

In California, general partnerships do not have to be registered with the State, although some are. If you are not registered with the State, then your corporate divorce can be a much more private affair. If you're going to dissolve at the State level, we’ll discuss those issues in a moment.

I want to give you a couple of examples of the type of liability that I'm talking about that a partner can cause to you. I have a client who had a partner, and the partner went behind my client's back, used their name, used their logo, used their business contacts and all of their marketing materials. They solicited prospects with all of these materials, and then collected money from those prospects who were anticipating doing business with my client. When the partner felt he had collected enough money, he disappeared. He absconded with the cash.

My client lost everything, their house, their money, their business, their reputation. They lost absolutely everything, but they didn't lose their freedom. Why? Because they went to the FBI. As soon as they found out about the scam, they went to the FBI and reported their partner. It didn't stop them from losing their house or their money or all the rest of the things that they lost, but it did keep them from going to jail.

The moral of that story is, in the event somebody is your partner and they're doing something that's exposing you to liability, then you need to seriously consider contacting the authorities.

I had another client that had liability just land in their lap. I met them at a party where they told me the company they worked for had merged with a publicly traded company a few months prior. Well, this person knew, absolutely knew, that every single document that had been filed with the SEC from the moment that merger occurred had been falsified. All of the documentation was filled with lies that were intended to get people to invest in the company.

I told my client, “Monday morning, I want you to call the SEC and find an investigator and make them investigate this. And you know, it doesn't really matter if they do investigate it, it matters that you are the one who approached them.”

This is true. When serious compliance issues involving the SEC or the IRS (or other alphabet soup agencies) come up, you want to make sure that you are the one contacting them and not the other way around. Because when it's the other way around, that's when fines and penalties and ugliness occur.

So, in the event that you have a partner that is causing you liability, then look to see whether you need to contact those authorities. If there is no fraud, if there is no reason to actually contact the authorities, then you need to look to the internal structure of the company to determine how to split the partnership and dissolve the relationship.

First, if you are an LLC, you want to look at your operating agreement. If you are a corporation, look at your bylaws. If you're a partnership, review your partnership agreement.

Your LLC, corporation or partnership that is registered with the State will have to file a notice of dissolution. A non-registered partnership can just dissolve using your internal bylaws rules.

Most importantly, look to your organizational document for the termination or dissolution rules. Follow those rules exactly. 

There may be some other agreements that you have to look at, for example, employment agreements. They might have some clauses that get triggered if that person separates from the company. Are they one of the really big wigs of the company? Then you may have a change in control agreement. You might have some insurance issues.

There may be a number of different agreements that get triggered or that apply in the event of a dissolution. So take a look at all of the contracts that you have with people with service, employment or consulting agreements with the organization. Make sure you're following all the proper bouncing balls.

Now, as to a corporation or an LLC, there are some internal formalities that you need to pay attention to. You need to get a resolution from the board of directors or the Board of Managers, authorizing the dissolution.

You also have to get the consent of the shareholders. Shareholders only do two things in a company, they vote on directors, and they vote on life or death situations involving the company and dissolving a company is definitely a life or death matter, so that you have to get their vote.

All entities will have to pursue getting a tax clearance certificate from the Franchise Tax Board. Remember, if you are in another state or country, talk to a local attorney to make sure you get the dissolution steps right. In California, you have to contact two different agencies, including the Franchise Tax Board and the Secretary of State. 

At the Franchise Tax Board, somebody has to assume the tax liability of the dissolving entity. You cannot just walk away from the taxes, and so that would have to be either an individual or another company. You contact the FTB, fill out a bunch of paperwork, and once the assumption of that tax liability is complete, they will notify the state that you're dissolving the company.

If the company has been in existence less than 12 months, then it's a really easy process. It's a short-term dissolution. If the company has been in existence 12 months or longer, then you need to actually do the long-term dissolution, and it might take a few weeks.

Now, I want you to think in terms of the assets of the company. When you are dissolving the company. Assets could be things like insurance policies and bank accounts that have this individual as a signatory. You'll have to change those things. Take a look at all of the moving parts of your business that have that individual as the go-to person. You need to change them. You need to change them all.

Now, if you have cash and other hard assets and you're dissolving the company, creditors are going to get the first tranche of money, and it may wipe out all of the assets. If that happens, the shareholders get nothing. That is the risk of being a shareholder. The company might go defunct without the ability to pay any dividends or to buy the stock back, or to do anything else with shareholders.

In terms of the assets, you pay creditors first, and then you pay preferred shareholders, and then common shareholders. That's very important. And you know, in this way, sometimes it's actually preferable to be someone who loans money to the company rather than being an investor in the company, because if you loaned money and you have a promissory note, then you're going to get paid on that promissory note, you're not going to get paid as a shareholder, and that's a good thing, because that puts you at the front of the line.

Ladies and gentlemen, these are some of the issues that you are going to encounter when you are dissolving a partnership, LLC or corporation. I want to thank you for joining me today on this week’s episode of Your Business, Accelerated! I’m attorney Shaune B. Arnold.

I invite you to follow me on Facebook, LinkedIn and Twitter X. In all of those places, I’m known as S.H.A.U.N.E dot Arnold.

In the meantime, and in between time, I am, …as always, reminding you to MAXIMIZE your COMPETENCE to get the CONFIDENCE YOU NEED to succeed.

I’ll see you right back here next week, on Your Business, Accelerated! Bye-bye, friends.