By Lane V. Erickson, Idaho Business Attorney
When a business begins it is sort of like the honeymoon of a marriage. Everyone is happy, has stars in their eyes, and looks to the future with nothing but positive enthusiasm. As we all know, the problem is, many marriages do not last. The same is true of businesses. When partners get together and begin a business they are filled with excitement. During this phase all they can usually see is optimism and success. No one wants to think about the business failing, or partners deciding they no longer want to be partners.
However, whenever I meet with individuals who are creating a business, I always have a heart-to-heart talk with them about the future possibilities of one of the partners dying, becoming disabled, or simply deciding they no longer want to be part of the business. My goal in raising these issues is not to dampen the spirits of my clients, but rather to help them create corporate documents that plan for the future in the event one or more of these foreseeable events actually happens. In fact, the best business planning philosophy partners can have when they are starting a business can be summed up in the often-heard phrase “plan for the best and prepare for the worst”.
For more than 70 years our team of premier Idaho business lawyers at the Racine law office have kept this philosophy in mind as we have worked with clients in the creation of numerous businesses including LLCs, assumed business names, corporations and partnerships. We have guided numerous clients through the process of protecting a business in all kinds of circumstances and in planning for and helping owners of these types of businesses resign from the business when the need arises. Our team of attorneys includes partners Lane Erickson and TJ Budge, and attorneys Nate Palmer and Dave Bagley. Our attorneys are skilled, knowledgeable, and experienced in assisting clients with all of their business needs.
The title of this article really sets the stage for what we want to discuss. We are assuming that you are an owner or partner in a business and for some reason have decided that you want to get out. So, what are the main things that you need to be concerned with accomplishing to make sure that your resignation is done correctly?
NoticesThe very first thing that you need to do is to make sure that you are providing the proper notices. The kind of notices that you need to provide will likely be spelled out for you in the corporate documents that exist. If your business is an LLC this would be an operating agreement. Alternatively, if your business is a corporation then this would be bylaws. Additionally, if your business is simply a partnership, there should be a partnership agreement that will guide you as to the types of notices you need to give.
In most instances, all of these documents will usually have language in them defining the specific types of notices that you need to provide both to the business itself, and to the other owners of the business. For example, if you want to sell your ownership interest in the business, and you have a buyer who has made an offer to you, the notice that you give to the business and the owners would likely need to include the offer that has been made. The reason for this is that in the controlling documents there is usually an option for either the business or the other owners to have the first right in buying your ownership interest from you before you sell it to an outside third-party.
As another example, if, rather than selling your ownership interest to a outside buyer, you have suddenly become disabled and simply need to cease being a part of the business, the notice that you give to the business and the owners will describe your circumstances. This notice will also usually follow language in the controlling documents having to do with what happens to your ownership interest. In most situations, your interest will be purchased by either the business itself or by the other owners.
Will the Business DissolveA common question that clients often bring up is if they are resigning from a business, does that mean that the business will automatically dissolve? This is a great question because it goes to the heart of the fact that these individuals are concerned about their partners and the other owners of the business. In most instances whether the business is dissolved or not is also controlled by the business documents described above. Usually, the business will not dissolve if the remaining business owners vote to continue operating the business even after you resign.
If there is no language in the controlling documents, then this issue would be controlled by applicable Idaho statutes. Like the controlling documents, the statutes provide a way for the remaining owners to continue operating the business if they so choose. Usually it requires a unanimous vote by the remaining owners of the business to continue operating the business even after you leave.
Value of OwnershipPerhaps the biggest issue that comes up when a person resigns from a business is how to value their ownership interest so that it can be purchased by either the business itself or by the remaining owners. Valuing an ownership interest in a business can usually be handled in one of three ways.
The first way is that the business documents themselves provide a specific formula for how the value of the business will be determined. All that then needs to be done is that the formula needs to be calculated and the ownership interest is provided mathematically. This is a good way to value an ownership interest in a business where the value of the business doesn’t fluctuate much.
Alternatively, a second way that an owner’s interest can be valued is simply by agreement between the owners of the business. In other words, if all the owners of the business agree to a specific dollar amount as the value of that owner’s interest, that is enough to satisfy everyone involved.
The final way that the value of an ownership interest can be determined, is by hiring an outside third-party to appraise the business and provide a valuation. In our experience, the third method is usually used when a disagreement arises between the owners of the business. This is the most expensive and usually the most time-consuming way of determining how much the owner who resigns will be paid for his interest in the business. Additionally, this method almost always results in hard feelings between the owners.
While this article is not exhaustive, it is designed to give you an idea of what happens if you decide to resign from the business you are a part of. If you are considering resigning in a business that you are a part owner in, and you have questions about how to go about doing it correctly, we can help!
Enlist an Idaho Business Attorney to Help YouOur team of Idaho business lawyers can help you with any of your business structure or operation needs. Whether you are seeking to create a new business or review a current business, we are available to discuss your options and answer your questions at an initial free 30-minute consultation. Call us toll free at 877.232.6101 or 208.232.6101 for a free consultation. You can also email us directly at lane@racineolson.com or stop by our office at 201 East Center Street, Pocatello, Idaho 83201. We will answer your questions and help you solve your Idaho business problems.