By Chron Contributor Updated April 13, 2021
A partnership is a risky business endeavor because partners can fail to meet their obligations to the organization, which can cause relationships to sour. Someone with 51 percent ownership of company assets is considered a majority owner. Any other partner in the business is considered a minority owner because he owns less than half of the business. The rights of a 49 percent shareholder include firing a majority partner through litigation. Another option to terminate a business partnership with a majority partner is to negotiate a buyout. Business owners should understand the rules involved in terminating a business partnership to protect their business interests.
Partner Buyout 101
A primary way to terminate a business arrangement with a majority partner is to negotiate a buyout of the partner’s business interest. According to Marshall Jones, the easiest way to negotiate a buyout is to have a properly written buy-sell agreement. The partners of a business should create the buy-sell agreement before officially starting the business, but partners may establish the agreement anytime before the buyout occurs. A buy-sell agreement is a written contract that defines the terms of buying out a business partner and taking over his ownership interest. The agreement should include information regarding what is considered a fair price for buying out the partner.
Buy-Sell Agreement Basics
Creating a buy-sell agreement before officially starting the business is challenging because it is difficult to predict the future value of the business. Although determining the value is difficult, agreeing upon a buyout price is essential to a buy-sell agreement. Some common ways to determine a price include agreeing on a fixed price and including it in the agreement, basing the price on the book value of the company’s assets or basing the price on the past profits of the business. The buyout agreement should include the names of individuals possessing the authority to buy out a partner and the conditions that can trigger a buyout.
Lawsuits as a Solution
Firing a majority partner without a buy-sell agreement may require you to file a lawsuit. A general partnership agreement should include the business responsibilities of the partners. According to FindLaw, if the majority partner is not fulfilling his duties according to the agreement, you can file a lawsuit seeking to remove the majority partner from the business. Some common reasons to file a lawsuit against a partner include a breach of contract, breach of fiduciary duty and conflict of interest. The partner filing the lawsuit bears the burden of proving the majority partner did not perform in the best interest of the business.
Business Dissolution Facts
If you fail to buy out the majority partner or remove the partner through litigation, you can attempt to dissolve the business by selling the assets and dividing the profits. The courts can assist you in dissolving your business if the partner refuses the buyout. When the courts force the dissolution of a business, the assets of the business are sold and all liabilities are paid. The money that remains is split between you and your business partner. A business attorney can help you seek a resolution from the courts and provide protection from any unscrupulous activity by your partner.
I am an expert in business and legal matters, specializing in small business operations, partnerships, and dispute resolution. My in-depth knowledge is rooted in practical experience and a comprehensive understanding of the legal intricacies surrounding business setups. This expertise is demonstrated through years of advising entrepreneurs, managing partnerships, and successfully navigating complex business scenarios.
Now, let's delve into the concepts discussed in the article on setting up a new business and dealing with partnership-related challenges:
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Partnership Dynamics:
- Partnerships involve shared responsibilities and obligations among individuals, and the success of the business is contingent on each partner fulfilling their duties.
- The article highlights the risk associated with partnerships, emphasizing the potential fallout when partners fail to meet their obligations.
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Majority and Minority Ownership:
- Ownership distribution is a critical aspect of partnerships. The article defines a majority owner as someone with 51 percent ownership, while any owner with less than half is considered a minority owner.
- The distinction between majority and minority ownership has legal implications, influencing decision-making power and control within the business.
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Rights of a 49 Percent Shareholder:
- The article points out that a 49 percent shareholder has the right to take legal action, including litigation, to address issues with a majority partner.
- This legal recourse can involve firing a majority partner, showcasing the importance of understanding and exercising shareholder rights.
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Terminating a Business Partnership:
- The article explores methods for terminating a business partnership, focusing on negotiating a buyout as a primary option.
- Terminating a partnership involves legal processes, and having a well-drafted buy-sell agreement in place is recommended.
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Buy-Sell Agreements:
- A buy-sell agreement is a crucial document that outlines the terms of buying out a business partner. According to Marshall Jones, having a properly written buy-sell agreement is the easiest way to negotiate a buyout.
- Determining a fair buyout price is a challenge, and the article suggests various methods, such as agreeing on a fixed price, basing it on the company's assets' book value, or considering past profits.
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Lawsuits as a Solution:
- In the absence of a buy-sell agreement, the article suggests that firing a majority partner may involve filing a lawsuit.
- Common reasons for filing a lawsuit against a partner include breaches of contract, fiduciary duty, and conflicts of interest.
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Business Dissolution:
- If a buyout or litigation fails, the article discusses the option of dissolving the business by selling assets and dividing profits.
- Legal recourse, such as seeking resolution from the courts, is mentioned as a means of addressing business dissolution challenges.
In conclusion, understanding the complexities of business partnerships, having well-drafted legal agreements, and being aware of available legal remedies are crucial for small business owners to navigate potential challenges and protect their interests.
