Business Breakups and Terminations
Nothing lasts forever, and at some point, a family business, partnership, LLC, or corporation comes to an end. While forming your business may have been complicated to some degree, that same element applies to breaking up or terminating it. If done incorrectly, then unpaid creditors could still pursue you, and you might find yourself on the hook for transactions made by a former partner or certain tax obligations. The exact procedure for terminating will vary based on the type of business entity involved, but there are several options to consider if your business–or relationship with your partners–is going under.Buyouts typically occur when someone wishes to retire, dies, is going through a divorce, becomes permanently disabled, or wishes to leave the business.
The interest may be bought by another business partner or may be redeemed by the company. This will depend on the governing documents and on the tax consequences. Your business’s governing agreement should have a procedure for other partners to buy out the partner or for a shareholder to sell his or her stock. Some agreements will provide for options to buy-out a partner under certain circumstances, or for mandatory buy-outs under other circumstances. A well-drafted agreement will also include provisions relating to the price and how payments will be made.
If the governing documents do not include provisions for a buy-out or contain incomplete provisions, there will be more open items to negotiate. For example, how will the purchase price be determined? Who will complete the valuation? Will the purchase price be paid in a lump sum, or through payments over time? What will be the interest rate? Will the partner who is leaving be restricted from competing with the business? Will there be any other agreements that need to be entered into, such as a lease or consultant’s agreement?
Setting the right terms is essential for a buyout. A seller may be concerned with having enough income to enjoy retirement. Both parties will be concerned with the possibility of default. Many buyouts have a low downpayment, low-interest rates, and longer buyout periods to ensure payments are spread out and the business will be able to continue to thrive. The buy-sell agreement can provide for security for the purchase price by way of a lien against the stock, partnership interest, or LLC member interest.
These are all items that should be discussed with your business advisor or attorney.A partnership can be established in Wisconsin without the need for a written agreement, although one is highly recommended. Other types of entities, such as corporations, do require a written agreement (i.e. bylaws). An agreement governing an entity’s affairs should contain an exit strategy and outline the procedure for voluntarily dissolving the business, usually by a majority, supermajority, or unanimous vote of the partners.
If no written agreement exists, then statutory defaults control. Generally, companies can be dissolved either by agreement, the happening of an event specified in the governing documents, by administrative dissolution by the State for failure to file an annual report and pay annual fees, or through a judicial dissolution, if the parties are unable to agree.
Once there is an agreement to dissolve, a filing may be required with the State, such as “Articles of Dissolution” for an LLC or corporation.
Once a business “dissolves”, it will need to “wind up” its affairs. A company that dissolves may still operate for a limited period of time after it dissolves to complete the winding up. The exact steps to wind up a business will vary and will be determined by the applicable Wisconsin statute and the company’s governing documents. Generally, a company will:
- Collect assets;
- Prosecute and defend any lawsuits;
- Take any action necessary to settle and close the business of the company (e.g. complete any outstanding work, notify customers, etc.);
- Dispose of property of the company (e.g. by sale or auctions);
- Discharge liabilities of the company (i.e., pay creditors);
- Distribute any remaining funds or assets to the owners.
Notifying the IRS and Wisconsin Department of Revenue is required as well. For example, for a partnership, on US Return of Partnership Form 1065, the company will indicate that this is the final return in the appropriate box. Similarly, on the Wisconsin Partnership Return, there is a box to check that shows you are terminating the business.
If your business was registered in other states, you or your attorney will have to file forms in each state that terminates your company’s right to do business there. Failing to do so can leave you and the other partners liable for taxes and other costs.
There may be other steps to wind up your business. If you are dissolving your business, you should work closely with your attorney and accountant to ensure that your business wind-up complies with your governing documents, state laws, and tax laws.If one partner wishes to leave the company and the parties are unable to come to an agreement, one option may be a voluntary withdrawal. Whether this is permitted will depend on the type of business, the governing documents, and the applicable statutes. For example, the Wisconsin Limited Liability Company Law contains a provision permitting a member to voluntarily withdraw from an LLC and receive fair value for the member’s interest under certain circumstances. This does not apply, however, if the governing documents restrict this right. For this reason, governing documents often contain terms prohibiting, limiting, or fixing the terms for a member’s voluntary withdrawal from an LLC.Businesses typically try to avoid bankruptcy, as owners have often personally guaranteed business debts, and they typically do not also want to file for bankruptcy personally to avoid debts. There may come a time, however, when bankruptcy is a business’ only option. Sole proprietorships, LLCs, partnerships, and corporations can dissolve or break up through Chapter 7 bankruptcy. Chapter 7 is a liquidation process whereby the business or corporate assets are sold off to pay secured creditors to some degree and deficiencies wiped clean. Unsecured debts are typically erased. Sole proprietors and partners will have to file individual bankruptcy if they are personally liable for their business debts.
If your business is considering breaking up or terminating, one of the first steps should be to sit down with your attorney to examine your options. If just starting out, have your partnership, by-laws, or other written business agreement reviewed for a sensible exit strategy for owners and others holding an interest.