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What is my business partner's debt obligations if leaving the business before any profit is earned?
Anonymous5 views4 answers
Our business is incorporated. We have three partners. We do not have a partnership agreement because the person (who is now leaving) didn't want to "waste" money on one. The remaining two partners would like to continue on with the business. The business is only 18 months old and is not making a profit yet. We are each carrying the same debt load and are split equally with 33.3333% of the shares. The partner leaving is getting a divorce and wants to move to another town. From past discussions we are feeling like this partner feels they can walk without any debt obligations. Their name is signed to a 5 year lease as well as a bank loan and there are personal guarantees on both. We have also all incurred the same amount of personal debt in this start up.
First of all, you are NOT 'partners'. You are shareholders (owners) in a business. The ByLaws of your Corporation are similar to a Constitution and set forth the protocol for 'leaving' (i.e. selling your shares to other shareholders etc.). However, you departing shareholder has personally signed and obligated himself to the debt of the 5 year lease and bank loan and start-up expenses. You need to consult with a Business Law attorney (easily found on .Com under Find-A-Lawyer) to sort this out and make sure the obligations are met. Good Luck!
You may have a right to "equitable contribution" but in the absence of an agreement your rights are rather limited. Now may be the sime for you all to consult an attorney to see if the departing shareholder will surrender or sell their shares. If not, you will have a shareholder in place, rights against that shareholder but not money unless and until you sue them, and administrative headaches.
I agree with my colleagues. The situation is already complex and requires consultation with a Santa Barbara Attorney. If the corporation was properly formed the bylaws of the corporation should have a section controlling this issue. Depending on the potential profits of the business, you may want to suggest the shareholder surrender his shares to the other shareholders in exchange for the other shareholders relieving the surrendering shareholder of the personal liability on all debts. Yet, you will have to get the landlord's approval to relieve the surrendering shareholder of personal liability which may be tough to accomplish. To do this you will need an attorney help structure the transaction and draft the documents.
Good luck with your case.
In addition to what my colleagues have written, let me add that you should not let this matter remain unattended. I suggest that you get an attorney to prepare an operating agreement for your business and ask the attorney to help you resolve your issues with the non-participating shareholder. The attorney may able to help the non-participating shareholder realize that simply walking away from the lease and the bank loan is not a good idea.
