Commenting on the survival rate of new businesses, a 2012 Small Business Administration statement noted that “[a]bout half of all new establishments survive five years or more and about one-third survive ten years or more.” In other words, according to the SBA, starting a business in today’s market and keeping it alive in the future is not an easy proposition.
The underlying reasons why businesses fail are myriad. Many businesses fail because the owners, partners, or members of the company can no longer work together, be it from different philosophies on how to run the business, to clashing personalities, to disagreements on how to split the work, the profits, or the blame. Needless to say, it is a high-stress situation where one is no doubt thinking more about the other business partner (and what he or she did or didn’t do) and less about their business. When a business breaks up for this reason, a dispute as to how the business’ assets should be divided often arises. These disputes often become acrimonious, contentious, and litigious. This is business divorce.
There are also several sorts of properties that can be disputed in a business divorce, each of which provides its own set of issues. When the business has multiple real properties, intellectual property, employees, and outstanding business prospects, how these assets are ultimately divided can be a complicated issue. Equally potentially complex, are the remedies which may be considered in a business divorce: Can and how may one partner buy out the other’s interest? Can the business be split into separate companies? Who will the employees work for, and where? The answers to these questions rely, in large part, on the business’ documents and other pre-business divorce practices.
There are measures which a business can take to alleviate a business divorce situation before it occurs. First, depending on the corporate form, whether the business is a limited liability company (LLC) or a corporation, the business should have a document such as an Operating Agreement or Articles of Incorporation and Bylaws which dictate the business’ internal governance—how the business shall run, how and by whom decisions for the business are made, and how to “wind up” the business’ operations. If your business is an LLC for example, and it does not have an Operating Agreement, Arizona statute provides what is, in effect, a default Operating Agreement. Those statutes dictate how the business runs and how it winds down, which as a last resort, includes filing a lawsuit for dissolution of the business.
Second, keeping good corporate records and accounting is invaluable if there is going to be a business divorce. Besides being a good practice for any thriving business, keeping good records and accounting provides a narrative for how the business was handled, how business resources were used, how members or shareholders acted in their business capacity, and will help any attorneys and accountants which will review the same. Of course, there are many other practices utilized by successful business in order to be successful and to avoid being an SBA business failure statistic. There is no wrong time to protect your business from a difficult business divorce. Planning for any contingency is a hallmark of a successful business owner. Indeed, the cleaner the break-up, the sooner the business owner can get back to doing business. If you are a business owner who may go through a business divorce, who is going through a business divorce, or who wants to plan ahead to mitigate a worst-case scenario, do not wait to consider what needs to be done in order to protect your business.