Page 40 - AVN September 2017

BUSINESS
BUSINESS DIVORCES
Breaking up is hard to do…
LEGALESE | By Clyde DeWitt
EVEN IF YOU’VE DONE NEITHER, you should be pretty aware of how easy it is to get married and how difficult it is
to get divorced. Well, there’s a strong correlation between the ease of matrimonial marriage and the difficulty of
matrimonial divorce and the ease of a business “marriage” and the misery of a business “divorce.”
So those who should read this are people thinking about “partnering up” with someone in a business venture.
If you already have done so, it is too late to accomplish some of what is discussed here. But this will provide
some insight to someone who wants out of a partnership.
Start with the fundamentals: In the real world, a business “partnership” means two or more people who are
shareholders in a corporation or members of a limited liability company. Anyone who operates a business as a
general partnership of individuals either is a masochist or had some really bad business advice (like from one
of these legal-form outfits that, in a very straightforward way, promise to give no legal advice). One exception
to that is where the partnership is between or among corporations or limited liability companies, where there
remains the corporate-shield protection from liability.
Here’s the problem with general partnerships: Each partner is liable to all of the partnership’s creditors for
all of the debts. That is, a creditor who obtains a judgment against a partnership can collect it from any of the
partners. Pretty scary!
Corporations and LLCs, as you probably know, have the advantage of protection from that. If a creditor
obtains a judgment against a corporation or LLC, it can only be collected from the assets of that entity. The
owners are off the hook. A notable exception is that the owners can be held liable for torts that they are involved
in committing. So, for example (a real-life story), if there are two shareholders in a corporation and one of the
shareholders orchestrates a copyright infringement scheme unbeknown to the other, the offending shareholder
can be held liable as can the corporation; but the unwitting shareholder is off the hook (although good luck
establishing ignorance).
Creating a corporation or LLC is easy. In some states, such as Nevada, the whole thing is computerized so
that an attorney can, for example, create an LLC in part of an afternoon; and that filing usually identifies the
members. So you’re off and running. Just like one of those drive-through wedding chapels on the Las Vegas
Strip!
Business divorces can be simple. If the business is really laying an egg, the owners can simply bankrupt the
corporation or LLC; and that puts an end to it—unless! That is, unless the operators failed to follow required
corporate formalities, by for example mixing corporate assets, liabilities, purchases and sales with personal
ones, failing to keep corporate minutes, failing to keep separate corporate bank accounts and credit cards, etc.,
and, especially, failing to keep up with annual fees, state taxes (especially in California) and annual required
filings. That kind of behavior can result in a finding of alter ego—piercing the corporate veil. If that happens, the
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corporation is treated as a general partnership. See
above!
So what happens if the business prospers and a
problem develops? Lots of things can happen. And
let’s talk about a business with two “partners” for
simplicity sake; the same problems can crop up where
there are more than two “partners” except that the
complexity increases exponentially with additional
“partners.” (“Partners” is in quotation marks here
because, as noted, generally it involves shareholders
of a corporation or members of an LLC.)
All kinds of things can happen. Without exception,
every partner in every partnership thinks that the
other partner(s) aren’t carrying enough weight; and
that has caused the demise of many a partnership.
(Find a partner who says that the other partner(s)
work(s) harder than he/she does—no such
thing exists.) Partners die. Partners get divorced
(matrimonially, that is), which invariably screws up
their lives, at least temporarily. Partners become
disabled. Partners file bankruptcy. It goes on and on.
One partner could die. (People all eventually do
that, you know.) If your 50/50 partner dies, then
you can find yourself in a partnership with your
deceased partner’s spouse, siblings or children, which
is not what you bargained for when you created the
relationship. Most importantly, it is unlikely that any
of those people have the expertise that your partner
had in terms of operating whatever kind of business
it is and managing a business in general. Worse, if
your partner’s heirs are multiple, such as his or her
children, invariably they will fight with each other
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