United States: Avoid A Bitter End For Your Business

Last Updated: July 1 2013
Article by Rebecca A. Isaacs

You've always dreamed of starting your own business—find the perfect partner, rent a great space, produce beautiful widgets together. If your business plan sounds a bit like a wedding fantasy, that's no coincidence. And while most marriages don't need or involve a prenup, the opposite is true when two or more entrepreneurs get together in a business venture.

When deciding to go into business together to follow a dream, not enough people do a reality check before tying the knot. You've got a unique product or service to offer, you've raised capital, what more can you need? You need to establish the terms of your ultimate separation with your partner (or partners). You may not be thinking of this on the front end, but even if your business succeeds, your original organization may not. The priorities in your business may change over time, you may take on new partners, and each of the original owners will want out at some point. The goal should be to manage your expectations with your business partner(s) now so that you don't have to do it in a crunch.

Get it in writing while the going is good

Think of your written business agreement as a prenuptial agreement. Yes, you hope you'll never break up. But most business ventures do, and it's much easier to agree on the separation terms while you are still in the honeymoon stage with your business partner. Write everything down now when you have the best opportunity for compromise.

What if you're already in business?

Even if you're already in business, it's not too late to write out your operating agreement. The point is to solidify everything in writing while you're getting along no matter where you are in your business lifecycle. You may have inherited this business, or purchased an existing one. Perhaps you recently merged with another company. Or your business has grown in a new direction and you see some of the big-picture issues in a new light. Anytime is a good time to put your affairs in order.

Writing out terms may bring existing conflicts to light, but clearer operating agreements will ultimately strengthen your business relationship, lowering the odds that you (or your respective heirs) will end up fighting with a partner in the case of an untimely break-up. By planning ahead, you'll rest easier knowing that you and your partner(s) have already written out the foundation of a healthy business exit plan—to end either the business or your collaboration on good terms.

Prepare for the worst, hope for the best

First, you and your business partner should envision every possible scenario that might lead one of you to leave the business. Depending on the nature of your relationship, this type of hypothetical discussion might come naturally for you. But it's not unusual for this to be a difficult conversation, even between the most collegial business partners, and if you have more than one co-owner, plan on having more than one conversation about the various scenarios.

Don't dance around the hard stuff. Talk about fights and how you'll handle disagreements. Talk about who is in charge. Consider the situations in which you'd take on a new partner. Imagine illness, bankruptcy (personal or business), economic and even natural disasters and their possible effects on your business. Be sure to discuss what happens when one of the owners dies. Does that person's share or duties in the company pass onto the spouse or children? You could end up in business with different people than you began with or intended, including people who do not understand the business and could jeopardize your security.

Get counseling, especially if you're really married

It's even more complicated if your business partner is also your partner in life. Whether your business partner is your spouse, significant other, relative, or friend, or is a strictly professional co-owner, you will want to acknowledge the personal dynamics and legal dimensions. You may want to seek out a trusted but neutral third party to guide and mediate these preliminary, informal discussions, much like premarital counseling.

At this stage, you do not have to hash out every detail or make any decisions. Just identify what you would value in your "ideal" business divorce—if there is such a thing—and decide together on the questions and issues that you'd like to discuss with your legal counsel.

Make it legal

This is important: Retain separate legal counsel to represent and protect your individual interests. It's not a sign that you distrust your partner, nor is it necessarily adversarial. It's just good practice with any contract. Besides your own lawyers, a third independent counsel may be retained to work with your separate attorneys to write the agreements.

Legal fees are costly, but typically it costs more to argue business dissolution with no prior agreement than to properly set up operating agreements that give explicit instructions upon dissolution. If you don't pay now to formalize your agreements, you'll likely pay a lot more later.

Steps to take, decisions to make

To prompt your discussions and help you prepare, we've compiled a few of the common questions that you'll address with your business partner and lawyers when drawing up the agreement. Keep in mind that these issues may vary with the type of business and entity.

  1. Who has the ability to expel an owner?

    • Can it be done with or without cause?
    • What percentage of the vote is necessary to expel?
  2. How will the purchase price be determined?

    • Formula
    • Capital account
    • Professional valuation
  3. Will the exiting partner or shareholder (or heirs) be paid cash upon exit, or over time?

    • If over time, will he or she have creditor rights?
    • Will the exiting partner/shareholder be required to provide a release
      from claims once payment is made?
  4. Will there be a split and distribution of property?

    • How is this determined?
    • Is there intellectual property that can or cannot be split? How will
      this be distributed?
    • Are there property rights of the exiting owner that should be
      considered, such as titles, deeds, registrations, warranties, etc.?
  5. Should there be a non-compete agreement?
  6. Will the company or other owners indemnify the exiting owner from existing debts or guarantees?
  7. What is the exiting owner's ability to access or use confidential information owned by the company?

    • Customer lists
    • Intellectual/proprietary property and information
  8. Timing – when is the best time to split or liquidate?

    • Are there obligations that have to be fulfilled before an owner can
      separate or a liquidation can occur?
    • Who will be responsible for these obligations, and when will they be
  9. Arbitration/Mediation – Consider a clause to avoid large legal fees in the event of disagreements.
  10. Consider the tax consequences of a sale of stock or buyout/liquidation.
  11. How will the other owner's/owners' voting rights be affected?

    • Votes cancelled
    • Votes reallocated
  12. How will negative capital accounts be rectified?

    • Deficit restoration clause
    • Allocation of additional income or reduction of expenses
  13. Consider life insurance policies on owners.

Renew your vows

Revisit the operating agreement often to ensure that it still represents the understanding and expectations of the owners. Things change over time. The agreement that was perfect for a new business may be an ill fit for a mature business. You or one of your partners may want a status change, or one person may want to move or slowly ease into retirement. As in marriage, roles change over time.

Your operating agreement may seem like it's preparing for the worst-case scenario. But it can also lay the groundwork for a happy ending. Ideally, your work on a business prenup will lead the way for your business succession plan so that you and your partner can exit the business when you each wish to, and do it on amicable, mutual terms.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.