19 Jan

Make Your New Year Happy By Getting Out Of Unhappy Business Partnerships

By Kevin J. Palmersheim

January 19, 2021

I often hear colleagues who practice family law describe how the new year brings an increase in new clients seeking to rid themselves of unhappy relationships. The goal of getting through the stressful holidays often leads to putting off a split, or sometimes results in the last straw before filing for divorce. Business partnerships do not involve all of the same issues (we thankfully don’t have to spend the holiday season with our partner’s families in addition to our own). However, finishing out the year and starting a new one is often the perfect time to analyze whether or not the partners you have in your Subchapter S Corporation, Limited Liability Company or Partnership are people you want to continue to be with until death (or retirement) do you part.

For many businesses, January is time to exhale after the end of the season crunch, either because of year-end sales or trying to wrap up projects and your books for tax purposes. It’s easy when you are going through those end-of-the-year tasks to put off addressing difficult questions, such as whether you want to remain in the same office, real or virtual, for another year with your business partner. However, the relief of crossing the calendar’s finish line also makes it easy to put off dealing with your inevitable frustrations.

In our experience, most partnership disputes develop over time, with increasing dissatisfaction by one or more partners. This dissatisfaction may be caused by different perceptions of the time or effort each partner contributes to the business partnership. Furthermore, past conversations among the partners about the unequal contributions are typically unsuccessful, because I have yet to encounter a partner in a business dispute who wasn’t absolutely convinced that her/his efforts were essential to the business — even when the time spent by a partner is often for that particular partner’s benefit, or is grossly exaggerated with respect to the positive impact it has on the company’s profitability.

In other words, in dysfunctional business relationships one corporate shareholder or LLC member often is not pulling his or her weight with respect to the ongoing business, and that has an increasingly negative impact on not only the bottom line but also the morale in the business.

Business partners often feel trapped. However, there are always options for business owners. Whether a corporation has a shareholder agreement or not, there are strategies and options under the Wisconsin’s corporation statutes for closely-held corporations to be split up, or for one shareholder to be bought out or forced to leave the business. Similarly, limited liability company operating agreements often address ways to structure an amicable split, and if they don’t, then the LLC statutes provide options for members to force a business divorce.

Not only is the timing right at the beginning of the year to consider how healthy your business relationship is, but there is a risk that if you don’t have a partner that is pulling his or her weight, your extra work for the partnership will never be compensated. Partners may not necessarily be entitled to receive extra compensation if they are working harder or longer than other partners. Unfortunately, the law may favor the slacker and require shared compensation even though the contributions were not equal. For example, a partner who performs all of the work of running the business, including winding up the affairs when the partnership is dissolved, is not generally entitled to additional compensation even though he was the only one performing work for the business over several years. See Bushard v. Reisman, 2011 WI 51, 334 Wis. 2d 571.

We recommend our clients have operating agreements or shareholder agreements with their partners to address some of these things ahead of time – kind of a pre-marital agreement for your business. But the reality of all of our relationships is that we tend to get extremely busy with operating our businesses and don’t get around to finalizing all of the details with our own business relationship, including agreements with our partners.

So if you do have a productive relationship with your partner now, then now is a good time to consider finalizing a new shareholder agreement or operating agreement in order to avoid future issues. If, on the other hand, you don’t have a written agreement in place (or don’t have one that allows for an amicable business split), and you are frustrated with dealing with a dysfunctional partner and want out, then now is the time to evaluate your options. Otherwise, you risk getting to the end of the next holiday season with the business pressures of finishing out the year, and being no closer to ridding yourself of a partner that is getting more than a fair share – and no closer to a happy new year.