With over twenty years of experience dealing with New Jersey business divorce, I wish clients would contact me when they first thought about a business break-up. Too often, partners, co-members or fellow shareholders forego legal advice and instead try to "make a break" on their own. Rather, they only hire legal counsel when things get ugly. Therefore, the purpose of this blog is to outline the duties between business partners. Additionally, I will provide some "do's and don'ts" when thinking about a business divorce.
The types of organizations that might exist in any given business relationship:
- A common law partnership is a type of business organization in which two or more individuals pool money, skills, and other resources. Likewise, they share profit and loss in accordance with terms of the partnership agreement (written or oral). In absence of such agreement, a partnership is assumed to exit where the participants in an enterprise agree to share the associated risks and rewards proportionately. Many people are surprised to learn that they have been operating as partners with someone with whom they've had an informal business relationship that turned into a genuine opportunity, making the rights and duties as between them of paramount importance.
- A corporation is an entity that is separate and distinct from its owners. In other words, stockholders/shareholders own corporations. As such, stockholders share in profits and losses generated through the company's operations.
- A limited liability company ("LLC") is a business that allows one or more persons to organize in such a way that their liability is limited to their investment in the company. The members are able to enjoy the single taxation feature of a partnership or sole-proprietorship firm. Members decide the distribution of profits and tax benefits.
Duties of the Business "Owner"
In each scenario outlined above, business owners, no matter the business structure, owe duties to one another while the relationship is ongoing. Also, they have duties during any wind down of the business. The nature and types of duties are far too broad to outline here. Simply put, you can create personal liability if you are not careful how you treat your fellow business owners. For example, New Jersey has a comprehensive set of laws applicable to partnerships, corporations and LLCs alike, which protect partners, shareholders or LLC members from oppression or other illegal activity by other shareholders or members. Many people are surprised to learn that, even where a business has been operating for years without a formal partnership/shareholder/LLC operating agreement, the law will impute certain legal obligations to the participants of that business.
I could write a book about all the crazy situations I have seen over the years. This experience has given me a short list of "do's and don'ts" to strongly consider before running for the exit.
- Hire competent counsel with experience in this practice area.
- Organize your files. Pay close attention to any agreements you have. Likewise, focus on files demonstrating the value of your interest and client base. Preserve all evidence.
- Begin to think about your next phase. However, don't act to form a new (competing) company until you meet with counsel.
- Continue to honor any written agreement(s) you have. Don't act precipitously to fire a co-member or lock them out of the business without the advice of counsel.
- Go without representation, or hire a general practitioner who only "dabbles" in this area. You will end up paying more in the end. When hiring counsel, ask for the attorney's actual experience litigating these cases.
- Download massive quantities of information in a surreptitious way. And, don't delete data. Bad move.
- Form a competitor with a name that sounds eerily familiar to the existing entity, email all of the company's clients about your new venture, and begin diverting customers and business opportunities to your new business.
- Take unilateral action to stop payment of salary to a long-standing business partner, lock them out of accounts, or other drastic measures, without clearing it with competent legal counsel.
In short, breaking up doesn't have to be hard to do. The key is proper planning. The ugliest New Jersey business divorce cases tend to be the ones where one or more of the business people took matters into their own hands without the benefit of legal counsel.
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.