By: Kristina M. Fisk
In the beginning of every business partnership, the future is bright. Sometimes, however, business relationships change. Perhaps one partner wants to take a different path or perhaps partners have a falling out they simply cannot overcome.
Whether the business is a partnership, corporation or limited liability company, my first inquiry is to determine what, if any, company documents exist. In the case of corporations, Bylaws and Shareholder Agreements will typically provide specific instructions for how to handle a shareholder who wants to sell his or her shares in the corporation. In the case of limited liability companies, an Operating Agreement should contain guiding provisions when a member wants to sell his or her membership interest. In a partnership, a Partnership Agreement should similarly define the process for a departing partner.
In Michigan, by law, a corporation is required to adopt Bylaws and a limited liability company must adopt an Operating Agreement. Partnerships, often more informal than corporations and limited liability companies, can form on the basis of a simple “handshake.” Partnership Agreements are not required by Michigan law.
The above-described company documents, if properly drafted, will provide instruction for the determination of the fair value of a partner’s interest and identify proper buyers. In most circumstances, the company or remaining business partners will stand first in line to purchase the departing partner’s interest. If the company, or remaining partner, does not wish to purchase the interest for sale, then the interest may be offered for sale to outsiders. In some circumstances, only the company or remaining partner can purchase a departing partner’s interest. These, and other sale factors will be defined in well-drafted company documents.
What happens when company documents do not contain guiding provisions for the departure of a partner or where partners simply never drew up company documents? In such unfortunate circumstances, we look to statutory authority for guidance. For corporations, we look to the Michigan Business Corporations Act, for limited liability companies, the Michigan Limited Liability Company Act, and for partnerships, the Michigan Uniform Partnership Act.
In some situations, business partners are simply unable to reach an agreement, whether it be on purchase price, terms of departure, or any number of issues. When business partners have exhausted efforts to amicably part ways, dissolution of a business may become necessary, but is typically viewed as a last resort and should not be pursued without proper legal assistance.
I encourage all businesses, be it a corporation, limited liability company, or partnership, to review company documents, preferably with the assistance of legal counsel, to ensure that the business is prepared to address the departure of a shareholder, member, or partner, as the case may be, when such situation arises. Inosencio & Fisk, PLLC, has extensive experience in representing and assisting clients in a vast array of business matters, including the preparation of company documents as mentioned herein.
This website and the contents thereof is designed for general information only and information should not be considered as formal legal advice nor the formation of an attorney/client relationship. The purpose of this post is to provide a brief and general overview of the subject matter.
If you have any questions regarding estate planning, please contact Inosencio & Fisk, PLLC, at (517) 796-1444.