Business relationships, like other relationships, don’t always work out.
When entering into a business relationship with anyone, no matter for how long, it’s important to ask yourself: “Can my business partner push me out?”
In almost all cases, the answer is that it depends on a variety of factors.
But it’s still important to make sure you know your rights and understand what you—or your business partner—can do.
Are you facing a dispute with a business partner?
Schedule a consultation with Wood Edwards LLP today to discuss your options.
Look at the Company’s Written Agreements
When registering a business entity, most states require an operating agreement. If a business does not have that, a shareholder’s agreement must be filed along with the registration documents. If drafted properly, these agreements clearly set out several operational details, including:
- The duties and powers of each of the business’ members
- Profit distribution percentages
- Provisions for the transfer of ownership
- Provisions handling replacement of members
- How to handle disputes between business members
If your business partner is trying to force you out, you should do this first. Check your company’s operating or shareholder agreement. Specifically, read any provisions about removing, replacing, or handling disputes between business members.
Buyout or buy-sell provisions are a common way to handle a dispute. These provisions allow either member to decide to sell their ownership interest. The other option is to buy out the other member under certain conditions.
There are several kinds of buyout procedures, though the agreement or state law may not allow all of them. If they do, even the most extreme kind of buyout provision (sometimes called a “Texas Shootout” provision) still requires a specific condition to be met before either party can offer the other a “buy or sell” ultimatum.
What If My Business Doesn’t Have Any Agreements?
Unfortunately, many small businesses do not have anything in writing. In the absence of any written agreement, state law (like the Texas Business Organizations Code) can provide default remedies and rules.
You can also look to state laws even if you do have a written agreement; the default remedies and procedures also apply when the agreement doesn’t cover the issue you are facing.
In either case, if you haven’t done anything that violates the agreement or state law, it will be difficult for your business partner to push you out.
Can a Court Force Me Out?
In some circumstances, a court can force a business to break up or dissolve. When a business dissolves, it frees business owners from their legal obligations to the business.
The person petitioning the court to force dissolution must own at least 50% of the business. Several people with smaller ownership percentages can group together as long as their collective ownership is at least 50%.
Petitioners must show the court that management is either hopelessly deadlocked or guilty of illegal activity. If the petitioner is claiming that the company acted illegally or oppressively toward one of its members, that member only needs to own at least 20% of the company. In these cases, a judge may decide that a forced buyout is more appropriate than total dissolution.
Unlike corporations, limited liability companies can usually only dissolve under certain circumstances. If a member can show that the LLC cannot operate without violating its operating agreement or articles of organization, that LLC may be dissolved.
Important Things to Remember
If your business has an operating agreement or a shareholders agreement, it’s likely that there are specific rules about when and how the business can remove or replace its members.
As long as you haven’t violated any of the conditions of the agreement, it would be very difficult for your business partner to force you out.
If your business does not have an operating agreement, you can look to state law. This may not offer solutions as fair or thorough as those you and your partner could agree on when forming the business.
Finally, a court can order dissolution or buyout, but only under certain circumstances. If you and your business partner have equal ownership of the business, your partner may be able to petition the court to dissolve it. To dissolve it, a fundamental disagreement needs to be preventing the business from operating.
Get Help from a Texas Business Law Attorney
It can be difficult to navigate a strained business relationship, but a Texas business law attorney can help. Contact Wood Edwards LLP to learn more about how we can assist you in resolving any partnership disputes.