Business divorces often develop from disputes that arise years after two or more people enter into a business relationship. These people typically have a personal friendship or familial relationship that influenced their choice to enter into business together. Eventually, the partners begin to disagree about how to run their business and their relationship deteriorates to the point that a business divorce is the only option. A business divorce is the legal separation of the owners of a privately held business. These proceedings can become increasingly difficult because one or more of the parties involved can develop feelings of betrayal, disappointment, or anxiety.
If the business is owned in a limited liability company (“LLC”), section 417 of New York’s Limited Liability Company Law gives owners broad discretion to include provisions in their operating agreements about the ending of the LLC. NY CLS LLC §417. The agreed upon end date might be based on a certain date or a certain event occurring. The operating agreement can also describe how the business assets will be divided and who will be in charge of winding up the business affairs. Partnerships can also make agreements regarding the division of business assets and an end date to the partnership. NY CLS Partnership §62. Section 601 of the Business Corporation Law gives similar rights to corporations when creating their bylaws. The bylaws of a corporation can include provisions about removal of a shareholder, director, or officer. NY CLS Bus. Corp. §601.
There may be situations that prevent a “clean break” in a business divorce. There may be lasting financial and fiduciary obligations that the parties are responsible for, and considerations that must be made for current employees of the business. It is important for the divorcing partners to continue to collaborate with each other to make sure that the day-to-day operations of the business continue while the terms are the business divorce are decided. In an LLC or a corporation, individual owners will typically be shielded from liability for business debts. 1 Liability of Corporate Officers and Directors § 6.01 (2019). The only way one of the owners would be liable is if they provided a personal guarantee. The business obligations are limited to the assets owned by the business at the time of its end. Partnerships, on the other hand, normally leave the owners personally liable for all business obligations that remain after the end of the business relationship. NY CLS Partnership § 26.
Minority owners in businesses often do not have control over how the business is run. Their rights and responsibilities as owners are often laid out in the business’ operating agreement. As a general rule, unless the operating agreement states otherwise, a minority owner has three basic rights: (1) the right to vote for the board of directors or the manager; (2) the right to review the books and records of the company upon request; and (3) the right to receive dividends. Majority owners owe a fiduciary duty to minority owners, and when they deny minority owners the right to participate in or enjoy financial returns from the company, it is called minority oppression. Douglas B. Hargett and G. Bartley Loftin, III, Minority Oppression in Limited Companies: The Birth of a New Claim or a Hole in the Law?, 77 Ala. Law *36, *39