QUESTION:
I have a startup, and my business partner is driving me nuts. What are the options I have for getting rid of him or separating the company into two? I’d like to know what other people do in this type of situation, so I can approach it in the right way. Thanks for saving my life!
ANSWER:
Ethan Stone
by Ethan Stone, Stone Business Law
First, a quick but important clarification: I’m not your lawyer and this answer doesn’t establish an lawyer-client relationship. I’m giving a generic answer to a generic question to educate the users of this site.
I’ll assume, in answering this question, that the founders didn’t plan for departures and separation when the formed the business. That’s generally a good idea (see my discussion here https://www.foundersspace.com/business/whats-the-best-way-to-bring-on-a-partner/), but if it wasn’t done, it can’t be helped.
I’ll also assume that the separation will be by agreement of the parties, rather than by legal maneuvering. If the parties can’t agree and a non-consensual solution is needed, the possibilities and the outcome will depend on how the form of business (e.g. corporation, LLC or partnership), where is was formed (e.g. Delaware or California), what, if anything, the governing documents say on the question, and what the parties have already said and done. If the situation is headed for a fight, an experienced lawyer needs to look at all the details and help develop a practical strategy. There might be a relatively easy way to sideline the troublesome person. If one of the parties is truly irrational, however, fights are likely to end up in court or festering for a long time without any resolution. In the worst case scenarios, the rational option may be to move on to a new business idea with different founders and an important lesson learned. Court cases can hold up the business for years and can cost much more than the parties are likely to get out of them.
With those assumptions, it’s important to focus on the problem as separation between people who aren’t seeing eye-to-eye, rather than “getting rid” of someone. The practical upshot may be the same, but psychology is important. If you want someone to reach agreement with you, it’s usually best not to make them think you’re trying to kick them out. If the other person gets their back up, it will be much harder to agree on anything down the line. Be aware of the strengths of your position (if there are any), but don’t get carried away. It usually costs money to enforce your rights and fighting is generally more expensive than agreeing. Revenge and domination can be emotionally satisfying, but they’re rarely good business.
So let’s assume the co-founders are practical people who realize there’s and problem and are capable of talking reasonably about solutions. There are several different ways to separate:
The simplest is for one founder to stay and the other to leave completely. In most cases, this means paying something to the departing founder. It may make sense to let the departing founder keep a minority equity position. The advantages are that the remaining founders don’t have to come up with cash, the parties don’t have to agree on what the business is currently worth and the departing founder can hold on to some hope of profiting from the business. The downside is that a disagreeable outsider will remain inside the business. It’s possible to control the risk with a shareholders’ agreement. For example, the departing founder could agree to vote with the remaining partners on director elections and major transactions. But equityholders always have some ability to make trouble, so a clean separation is best. If the parties can agree on a price but don’t have much cash, it’s worth considering paying the departing founder with a promissory note. If the business plan calls for outside investment from angels or VCs, however, using debt requires some thought. On the one hand, angels and VCs take a dim view of using their investment cash to pay off long-gone founders. On the other hand, they also don’t like troublesome stockholders hanging around. Ideally, the note should be freely pre-payable and the remaining founders should be prepared to pay it out from their own cash, if necessary.
If you can’t agree on who should leave, the next thing to consider is splitting up the business. Whether this is practical or not, depends entirely on the business and the founders. Typically, the main issues you need to address are dealing with the property (physical and intellectual), the co-founders’ future business activities, and the employees (who is going with which founder). Try not to get bogged down in false either/or decisions. It’s often practical to share the use of property through leases and intellectual property licenses. Likewise, it often makes sense for both founders to carry on the same business in different geographical areas, different industries or different applications. Just make sure the separation is clean enough that you won’t be getting in each other’s way.
It’s worth emphasizing that a competent lawyer is necessary in a situation like this to make sure whatever is done cleans up the mess, rather than making it worse. Getting a clean, enforceable separation that will produce the results you want (including tax implications and title to IP) is simply not an easy DIY project. It is best to involve a lawyer before starting serious discussions, to make sure the discussions proceed in legally workable ways.
Ideally, each of the separating founders should have a separate lawyer. If that’s not practical, the lawyer will generally insist on representing only one person in the transaction. That person might be the business entity, rather than one of the individual founders. FYI, a lawyer who doesn’t bring up this issue at the outset is probably not competent.
Hi. I am shareholder in family supermarket business . We have been working together for the last 20years . We are 3 families with 33%shares each . We also have a branch in another city that is run by the other family but as a part of the business as in we share the profits as three families. So recently I found out that the fanlike that runs the other branch is not loyal so we did a valuation of the whole business that came to an approximate of $5,000,000 ( this includes stocks and properties after deducting all the debts that the company owes outside .
So my family decided to quit but the other two families want to keep all the main physical properties and also does not want to give cash fans instead wants to give the amount in in very unreasonable installments ( $90,000 every six months )
Is throw should I handle this situation.
Please assist me .
I have a question if two partners own 50/50 c corp one of the.wanted out and left but still claims to be president and part owner but has not brought anything to the company in the last couple of years our accountant and lawyers have a buy sell agreemeent at was made back in the 70’s will it stand up she seems to want more should we got to court we have been generous in offering half but she wants more! What should we do?
My business partner has essentially hijacked our 50/50 LLC online business. She has locked me out of all company accounts including email accounts, social media accounts, online company store accounts, PayPal accounts and removed my name, phone number and email address from our jointly owned website–damaging my reputation. She also closed our joint bank account. During our dispute, she refused to answer my phone calls or emails and refused to meet in person. I managed to get her to conduct an attempted meeting over text message but she refused to negotiate any sort of agreement and turned the meeting into a petty and absurd complaint session. What options do I have at this point? Is there anyway to force her to meet in person? She is so far unable to muster up the courage to face me to explain her actions much less come to a resolution.
my husband has been in business with his partner(brother)for over 30 years in the fast food business.they have a lot of issues lots of arguments daily.in the past few years our sons work in the business and his son has been bullying our son and also he argues with hes father on a daily bases. 2 days ago my son walked out and hes quieting. my husband finally had enough and we are thinking either to sell or buy. now the problem is we don’t have any partnership agreement they are 50% partners but no agreement or corporation what do we do? we know deep down he wants to split but hes not easy to deal with. we are thinking to tell him that its over either him or us. do we tell him to bring an offer and we do the same and who ever comes up with the higher amount keeps the business? what about if he refuses ? whats next?
Good Afternoon! I have a question I made an investment with a business partner of about 50k and I’m having the hardest time getting paper work from him regarding percentages and things of the nature of listing sources of how the money’s was spent etc. He originally titles me as Manager of operations of the label until I started to question about my paper work regarding my investment now he has listed me as a silent partner in the company but yet I still have no paper work! So my question is what is my next step?? I am trying my best to be civil without taking to civil court because i did agree to invest but at the same time paperwork was negotiated at the time of money exchange and even before then… but still no paper work for my proof of investment. So should I seek an attorney because at this point next month will be a year
And I’m more than tired of being nice so i have started to get my own legal silent partner affidavit legally prepared before the 12th month comes and expires. Please advise me on what to do if all possible! Thank you kindly for your time!
Respectfully Yours,
M.T
Miguel, I create a business 20 yrs. ago I incorporate 5 yrs ago.I had 2 clients who had a construction company and ask me to partnership so i add them to my contractors license 2 years ago, ever since then I am the only one running the company that I get a miserable paid check and basically work as an employee we never have meetings and I have had strong disagreements with one of them. I also find out that they own the building that we rent under a different business extremely expensive and they also move all operations and paper work to their main office. I completely lost trust on them. How can i get my business back if you can please gide me. Thank you.
We have a production only based Construction Company with just three owners. My husband and myself on 60% and the partner that we brought on three years ago owns 40%. He was a friend and did not pay any money to buy and not even a penny. He has gone through a divorce and turned into a paranoid and confrontational person. He does not carry on any ownership responsibilities anymore. He just shows up to work like an employee and has expressed dissatisfaction as he always questions everything we do to run the business which we have been running since 1999. My husband does a lot of extra things like bidding and contractor change orders and such that he does not charge for his time and does after hours or on the weekend. I do the bookkeeping part-time. This partner has also use the business bank card to purchase things such as new girlfriend’s airfare and flowers for his ex-wife as well as purchases at Walmart for things for his personal vehicle and groceries over several months . So essentially he has committed fraud by misusing the company funds and we finally had to take his bank card away and to take him off of the checking account so he wouldn’t go in and withdraw a large sum of money and take off as we suspected . The partner wants to leave and we came up with the agreement that we would finish all of our jobs up over the next few months pay out all of our liabilities and then divide the money that’s left in the checking account 60 / 40%. We have been told that since we are a production only based business that our business is not worth anything to sell per se since our name isn’t worth anything because our clients have to take whoever is the lowest bid. The partner has become hostile and constantly tries to pick fights about miniscule things. The contractors board worker verify to me that he has applied for his own contractors license. So he is planning to start his own company as he has stated to us as well and compete against us. That part we are okay with because we know he will not succeed as he doesn’t have the financial means or the experience. We feel like he is just trying to make things difficult so we will give him so that he can just squeeze as much money out of us as he can since he is so money-driven and strapped for money. We also received an anonymous letter in the mail from a local family that stated they overheard his conversation at a bar and that he is going to run us out of business and make a sorry that he ever met us. The office is run out of our home as it has been since 1999. We just want to finish up our jobs and keep everything kosher so that we can split the money at the end and move on. We had an attorney draft a buy-sell agreement splitting the money that way at the end after all the jobs are completed and all the debts are paid down with my husband feels is more than fair. But we are concerned that he is going to try to go to the courthouse as he is constantly threatening us. Do you have any recommendations for a better way to try to resolve this? All of our jobs will be completed in about three months. Can we change the name on our business at the state and contractors board? Should we start our own company? Should we just dissolve the corporation at the end of our work? Thank you for your help.
I have a business partner who has become irrational and verbally abusive. I have several pages of abusive and derogatory texts and emails he has sent me. He had agreed on a price to sell his stake in the company and his conditions have been met it. Ow he is dragging his feet.
Can I execute a “shotgun clause” without a shareholders agreement? I want the company to continue he and he has made it clear he wants it dissolved but we both have personal guarantees with the landlord.
Hello,
I have a startup which is set to launch in June. There are four partners total. I have 40% of the company and am CEO. One partner is becoming a liability and is blocking us from moving forward accordingly. Our CFO which has 15% agrees as well. The fourth partner stated he will not do business if the unruly partner is out. I formed an LLC and contracted that we must vote as a whole and majority rules. I, being CEO with 40%, having the final say. That being said, if we are voting out two partners will they have to sign paperwork or is a final letter be suffice signed by the majority voters. Being unruly I’m thinking after they are voted off the island they won’t be willing.
Hi,
I intend to start up a small Cafeteria Business along with my two other friends who will run the show, as I will be just investing for all the required equipment & the annual Rent for the Premises. The profits will be shared on a (50-50)percent basis. However the ownership would be on a (60-40) i.e 60% for myself & 20 + 20 for the other two partners.
Please advise on details to draw up an agreement
Thanks & do look forward to hear from you.
Regards
ASH
I need some help my ex girlfriend. Is tring to keep my construction bussiness i need to sell it .if anyone can give me advise please
I am the owner and 100% shareholder of a small business , with 8 full time employees . The business is in its 13th year with an annual turnover of approximately £1,000,000 , profits of around 30% . I want out ! How ?
I and my two family member partners suddenly inherited a small business. I am 33 percent owner and it was agreed on that I would be in charge of day to day operation because I was the most experienced (at that point 18 years working for the previous family member owner). After 11 years of work and trying to keep the peace I am tired of carrying the load and having them make the same. while any improvements to day to day operation that are not convenient to them are disregarded and under cuts my position with the non family staff members. They need me or someone as experience as me to run this business. Also to note they are a closer relation to the original family member owner than I am. (Ie son, son in law, nephew).
Any one who has experience in trying to buy out 66 percent from family members would greatly appreciate it
I have a small gardening and building maintenance company,my business partner has decided to leave in April.We have a transit van with finance,also a trailer we got together with our own money at the beginning 5 years ago.I want to keep on running business myself but he wants to split all tools and machinery(lawn mowers,strimmer chainsaw etc)we have no business agreement when we set up,has he got rights to do this or can he just have his own personnal tools back.Need advice please.
I have an EX who has 5% invested as a “partner” stakeholder (no work, no effort, no input or active involvement ever); the relationship is dissolved, rendering status in business pointless, it’s an LLC and I don’t want any future issues with this individual (I do foresee them if I do nothing and move forward with business).
How do I remove this person (communication is not an option or basic reason)?
Recently one of the partners was sent to jail (not business-related charges) to serve a sentence that will put him out of the game for a while. Additionally, we discovered he has been using company equipment to run a side business that does exactly what our company does. In essence, he is competing with his own company. While we don’t have proof, we suspect he was buying that inventory at least partially with company cash (as in paper money).
My question is given that we do not have special language in our LLC agreement that someone can be voted out, is there legal grounds to remove him from the company?
HI there I am the founder of a company and own 60%. My partner and I do not agree on alot of the debts related to the business. She believes all debts incurred before her investment should be my sole responsibility, not the business responsibility.
I’m really struggling getting her to realize that bisiness debt is business debt regardless of when it happened. She made a investment into my company as a silent partner and did not ask questions. Now I want to be 100% owner again because we can not agree at all! How can I approach this because I feel like she will never want to sell me back my shares because we are profiable. Any advice would be great. Thank you
Hi
I had invited a friend to join me in a business venture as she was so talented and had connections and we registered our company, soon after registering I realized that it was a big mistake bringing her on board, the company has been registered for 5months and since I’m the only one doing the work, I do everything in the company and have brought in all the clients we currently have and she has brought none.I would like to part ways with her as she’s dead wood and I would like to fly solo as I’ve been doing. She has not brought a single penny to the company, the little bit that the company has was because of me 100%.Please advise on how I can achieve parting ways with this partner
Hi Iam Sonu just one year ago we started a small partnership business and from stating business our partner never beloved us even he didn’t given password to our stock reports to us
I was a good Samaritan and helped this person,who is from Paris,France, was wanting to open a business with an investor visa to stay with her son who is a U.S. citizen. I set up the LLC/business license and all needed with my credentials because she did not have her documents. She did invest the capital she needed to get her visa 2,which she received. but I have worked my but off holding down the fort while she went back to paris to meet with the embassy. Long story short…she is a micro manager and very hard to let a long with. We are 50/50 since I have found our great employees, and all. I have decided to walk away so I need to know what I can take with me for all my hard service. We have been in business since June 2015.
Hey there im 50/50 in a partnership I was a sole trader before and brought my freind on board and we set up a new name and went from there.we haven’t been running for more that 6 months.things are rocky and we just clashing a lot.ive tryed to sit down and talk but it doesn’t really work that well. I’m seeing the red flags now.how and what are some steps I can go thru to keep the partnership name we trade under and what would I have to do to break him away
I am a 50/50 partner and one partner is removing the partner off policys’ not telling the other partner. Can that be done.
I am 50/50 partner in a small start up business. Three years ago, my business partner became very adversarial. He committed some very unethical business practices. I am also a victim if cyber bullying, personally and professionally, due to some very damaging social network posts he had posted. I had to personally sue him, which I was awarded a judgment of over 500,000. He has left the state and abandoned his ownership responsibilities.
I am out of money for lawyers, but I had the business valuated. I would like to use part of the settlement to use for the buyout.
After the egregious acts he did to me and the business(which is exactly how the magistrate had stated), do I need his permission to buy him out?
Do I need to pay for a lawyer or can I make that decision without his approval? Are there Ohio LLC laws that allow for one business owner, who maliciously tries to ruin the business and business partner and abandons the business and his business responsibilities to be removed without a 50% say?
If I approach him, he may contest a buyout, but with a court judgment of over 500,000 and not doing a thing to pay me back. Would I get much legal resistance due to the court judgment?
I m 50%owner of llc company but i left to my partner we decide to give me amount of money but now refuse to give me my money i m working another job now and i don;t know what is the best way to take my money back for all investmens and the bussines can somebody give me a advice pleace
I need to know what is the best way to get my partner off the business and he agrees that is the best thing to do.
I started a business more than a year ago. I made the mistake to include my husband as 50% owner. Even though he did nothing to start the business. We are planning to divorce and he wants to keep 50% of the business and is not reasonable. He doesn’t accept any buy out money. I would like to include my daughter in the business to have majority. Can I do this? I would appreciate your opinion on this matter. Thank you in advance.
Hi Heidi. I am responding to this post because once upon a time I was in almost an identical situation. I had a partner who did almost nothing. She woke up late every morning and went jogging until about 11 to get in a few emails before lunch. She made maybe 1 client visit a week and that was pretty much her work schedule. I created all the documentation, taught and trained her on even the most basic functions of the business (which she purported to know prior to becoming partners), and she made our company look bad on multiple fronts including client visits and phone calls. I don’t know how I got into business with this fraud but it happened. Lesson learned. I had to sue and finally resolve the issue with a small monetary payment.
What your partner wants is unreasonable based on your story. She may not think it, but 15% is a huge amount especially considering the lifetime of the business? She essentially wants something for nothing (if nothing else, this unreasonable demand tells the whole story about her). Anyway, depending on the dollar amount and what entity you have (S-Corp, LLC, or just a GP which is the default if you have no entity or a defective one), then you need to approach it differently. If I were you, I would flat out deny her request. I would make her pay liabilities if your business is losing money and giving her the responsibilities of the partnership. If she really wants out then buy her out once and for all for a nominal sum worth the contribution. Just use current value. Revenue – expenses and the net is the total value. Give her 15% of current value of that net. If that doesn’t work hire an Attorney. I don’t expect this to cost much based on your situation but a strongly worded letter might do the trick, especially if she isn’t going to fight it.
Good luck.
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I recently started a small business with a partner. After some initial startup it became clear that she really does not have time for this business and that she doesn’t have anything to bring to the table of any value for the business. She realizes this and says that I can be the sole owner, however she wants to receive 15% of the profits for the life of the business. I feel this is way too much considering we are still in the start up phases and have made minimal money to date, all of the clients and sponsors are from me and I have done most of the work.
I would like to buy her out, but I don’t know how much that would cost. She seems to want money. Is there a way to calculate the worth of our business?
My other option is to give up the name and start my own business alone. Which may be the best option, though I like our name. What do you think?
Thank you,
Heidi
It depends how the company is structured, what agreements are in place, (buy out provisions, right of first offer)and who has controlling interest.
If you want to be really dirty you can simply dilute the ownership percentage of the company by issuing more shares to the three good owners for equitable contribution.
There is really no nice way of getting rid of a bad partner/shareholder. It will get ugly, especially if he owns more than 10%.
If they won’t accept a tender offer, your going to have to get creative.
Most likely the easiest way is to dilute him out by bringing in another partner who buys in for newly issued preferred shares or something.
This is really why I prefer the LLC vs the C-corp.
-Mark A. Bartholomew, Managing Director
Newport River Company
I am one of the two founders of my business.
Now there are four of us; one of which is “defective” meaning that he did not keep up on his verbally agreed part of the business.
The only thing in writing that he has, is a certificate of shares (that isn’t even under his name but under a corporation, that if I am not mistaken is dissolved)…
We suggested he leaves, as he has already collected back his initial investement, and then some, but he refusess, hoping that he will get more…
What can be done???