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Business Divorce: When You and Your Business Partners Decide to Part Ways

business divorce.jpgIf your business got to a point where you and the other partners fail to get along, the dissolution of your business can be as emotional as a divorce in family court. When you first enter into a business, you form an entity to limit your liability and save money on taxes. These advantageous benefits disappear when you decide to dissolve the business, but your liabilities will not.

Under California law, when you no longer do business or decide to terminate the business entity, you need to go through the process of dissolution that will be the formal end of the business entity. This process can be voluntary or involuntary, contested or agreed. Because the law mandates the dissolution of your business, and liability may be present after dissolution, it is very important to develop a comprehensive exit strategy, especially if one or more partners contest the dissolution.

Types of Dissolution

There are a few types of dissolution, some already mentioned above, which include voluntary dissolution, involuntary dissolution, agreed dissolution or contested dissolution.

  • Voluntary dissolution occurs when the members, partners or shareholders vote to dissolve the business.

  • Involuntary dissolution occurs when the Secretary of State or court orders the dissolution of your business.

  • Agreed dissolution occurs when a majority of the members, shareholders or partners agree to dissolve the business.

  • Contested dissolution occurs when some partners, members or shareholders want to dissolve the business but others don't feel the same way.

Overview of the Dissolution Process

California law dictates the dissolution process for the various types of business entities.

  • The first step in the dissolution of process is to have a vote amongst the members, partners or shareholders, to initiate the process of dissolution.

  • The second step includes filing a certificate of dissolution with the Secretary of State.

  • Third, a final tax return must be filed for the business, prior to it being terminated. Tax obligations may persist after dissolution.

  • Fourth, all creditors of the business must be notified that it is dissolving and settle all claims with them.

  • Lastly, business assets must be distributed or sold and assigned in proportion to the business owners based on their respective percentage of ownership.

This is just a general overview of the dissolution process. Depending on what type of business you operate, there may be other laws or regulations that you must follow. However, it is important to note that dissolving businesses usually run into issues when they fail to notify creditors of the dissolution. If you fail to notify creditors about the dissolution of your business, they can quite possibly sue you even after the business is dissolved.

Contact an Attorney

As you can see, dissolving a business is complex in nature. If your business is on the brink of dissolving, you should contact an experienced San Jose business law attorney who will be able to advise you of the most efficient way to dissolve your business, assist you in dealing with the partners, members or shareholders and give you peace of mind knowing that all of the liabilities of the business will be taken care of.

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