How to Prevent and Prepare For a Business Dissolution

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Owning a business can be a challenging and rewarding task. As difficult as it can be, it becomes even more difficult when your business needs to be dissolved. If a business is not properly prepared for dissolution, the process can be a costly, emotional, and often a litigious one. Although nothing can guarantee a hassle free and cost-effective dissolution, there are certain steps you can take prior to dissolution that can help make it as simple as possible.

Steps to Take at the Time of Business Formation

When you are taking steps to form your business, it is a good idea to have a very thorough and well-articulated business agreement. Many people mistakenly believe that a bad agreement is better than no agreement at all, but that is simply not the case. When there is no agreement, the parties would default to the California Corporations Code. This could be a benefit to the parties, rather than an agreement that is badly written.

There are certain provisions that are significant in a business agreement and can very often be the cause of issues in a business dissolution. That is why it is important to specifically address these areas, and to provide clear and precise guidance to avoid a messy dissolution in the future.

Spousal Interference: Many businesses do not account for what would happen if one of the partners goes through a divorce. There are potential situations in which their interest could be community property, thus giving some control to the spouse.

Competition with Former Partners: Many agreements do not provide for a non-compete clause for former partners. Oftentimes when a partner has been expelled from the company, they promptly start another business conducting the same business. Therefore, it is crucial to incorporate a non-compete clause for these situations.

Buy Out Circumstances: Business agreements generally address what would happen with the death or disability of a partner, but rarely address what would happen during a divorce, or bankruptcy, in the event a partner commits an egregious crime of moral turpitude, or even if the partner acts with poor performance.

Governance Provisions: It is crucial to be clear as to what would happen in deadlock situations. This can help avoid a dissolution, or can guide the partners through issues in which they are unable to mutually agree upon a decision concerning the business.

Estate Planning: Clearly addressing what is to happen in the event one of the partners passes, is beneficial to the company.

Valuation and Payout procedures: Specific valuation and payout techniques must be addressed with specificity in the agreement. Many provisions pertaining to valuation are ambiguous or vague, and are rarely followed after signing the agreement.

Remedies: It is standard to include alternative dispute resolution provisions in a business agreement. However, very few people understand the rights they are giving up and what they are agreeing to. It is important that all partners signing the agreement fully understand the provision.

Steps to Take Immediately Prior to Business Dissolution

If the business agreement is already in place, there are still certain steps that can be followed to help mitigate the costs and adversarial nature of the dissolution.

First and foremost, it is important to have reviewed the business agreement. The partners should be aware of what the terms and provisions are, and be familiar with its contents. They should also be ready to explain what breaches the partners have committed, and if the partner seeking dissolution has also breached any of the terms of the agreement.

It is also a good idea to speak to an accountant or tax attorney to be aware of any potential tax consequences of the dissolution. Similarly, it is crucial to be aware of third-party consequences. Clients, other businesses or vendors that the business works with, may sense a pending dissolution and reduce their involvement.

Most importantly, it is almost necessary to hire an experienced and knowledgeable business attorney. They can guide you through the entire process. It is always the goal to settle before litigating the matter. Having an attorney who can guide you through the process can help settle issues amicably. This will ensure the matter remains simply and straightforward. Having a legal professional guide the partners through a dissolution will help resolve the issues quickly and cost efficiently. It should always be the first, and best decision to be made at the time of a business dissolution.