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Understanding the basics of a business divorce

If you thought starting a business was difficult, try ending one. There are a many reasons a business partnership might end and just as many ways to do it, but before you close the doors for good, there are some important proceedings you need to understand to avoid unintentional fraud, tax evasion or other tricky legal situations. In general, any time a business partnership ends, or divorces, it can be grouped into one of two categories: real or technical termination. Once you see which fits your circumstances, you can make an appropriate plan and move on to the next phase of your life.

Real termination

In a real termination, no aspect of the business will remain. Every branch of the business will completely close and not simply change ownership. In order to completely dissolve a partnership, a handful of steps need to be taken:

  • Vote to close: The various partners must pass a vote to end the business according to the bylaws that were made at its outset. This step must pass to continue with the termination.
  • Dissolve with the government: However the business is registered, the state needs to be informed of dissolution. This also involves cancelling licenses, permits and the registered business name(s).
  • Liquidate assets: This is the biggest difference between real termination and technical termination. When a business dissolves, all assets have to be sold or liquidated in order to facilitate a fair distribution in the end.
  • Settle debts: Debts need to be settled with all investors and all taxes have to be paid. It's important that this happens before the next step.
  • Distribute remaining goods: All partners are paid their share of the funds that remain after the debts and taxes are settled.

Like with marital divorce, business divorces can be complicated and bitter. Some partnerships dissolve neatly, and others have strict agreements that were made when the business was started. In many cases, mediation can be very helpful to make sure everyone is treated fairly and unnecessary lawsuits and proceedings don't mire the process.

Technical termination

This is the other main way a business partnership enters divorce. It can also be complex at times, but the major takeaway is that the business, or at least some aspect of it, will remain in operation after the termination concludes. These kinds of terminations really only exist to create the appropriate paper trail for tax law. A divorce is classified as a technical termination when at least 50 percent of the ownership changes hands within a 12-month timeframe. Often, when this occurs, a contract is made for a buyout of one or more partners and the process is fairly straightforward. Ultimately, this phase is when names are changed on the legal documents and everything else is concluded according to the prearranged agreement.

If your business partnership is ending, contact the business law firm of Bernstein & Feldman, P.A. Our attorneys can answer your questions about business divorce; including the steps that you need to take and what type of dissolution might fit your situation. Ending a business can be complicated; our attorneys can help guide you through the process efficiently and effectively.

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