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When Forming a New Business: Always Include Steps for Dissolution

Whenever you're at the point of starting a new business, regardless of the precise corporate structure you’ve chosen, you must create an operating agreement that includes binding instructions on how the company must be legally dissolved at a later date. Far too often, a group of partners will feel so tightly bonded to one another that they overlook the critical nature of such arrangements. After all, businesses tend to come and go at a rate that is sadly comparable to many marriages and other personal relationships.

            If you’ll always remember that the burden is on your shoulders (to a very large extent) to clearly spell out how your firm's assets and debts will be addressed should your company later choose to disband, you’ll be far ahead of others who leave out such provisions.

            Drafting binding steps for dissolving your business is crucial, whether there are just two of you involved or a very large number of partners -- as well as many employees by the time a split is one day being contemplated.

What Exactly Should You Do to Avoid Bitter Business Breakups?

            According to Scott Gerber, founder of the Young Entrepreneur Council (“a national invitation-only network of entrepreneurs under the age of 35”), you must address this type of event “when you're just starting out . . . You can do this by including in your operating agreement a set of instructions for how a split would go down . . .” Among other topics you should address might be the need for any departing founder of the company to “sign a non-solicitation agreement should he or she decide to launch a similar business after leaving.” 

Should you and your intended co-founders of a firm be unable to reach a clear agreement as to what all must take place at the time of a breakup, Mr. Gerber and others believe you should consider hiring an outside mediator to work with you. It might also be useful if everyone agrees in advance (in writing), to accept whatever final written terms are presented to the group by the mediator (after time is allowed for review, debate and revision, if necessary). You might also want to set a deadline for when the revised operating agreement, including the dissolution instructions, must be drafted and then fully executed by all of the key parties.       

Why Most Business Breakups Tend to Occur

            Unfortunately, everyone involved in a business venture may not be used to putting forth his/her best efforts on a daily basis. You may think you really know your desirable business partner quite well. However, there's an old adage that you really don't know a person until you either marry them or regularly work with them.

            Business break-ups usually occur due to one of the three following major events.

  • One business partner comes to believe that he or she is either doing the majority of the work (and/or is bringing in most of the new clients);

  • One or more members of the firm believe another member is doing a very poor job managing the firm's assets (and is refusing to step aside), or

  • One of the firm’s key partners or members is using business assets for private personal gain.

Regardless of which one of these events (or combination of them) is occurring, the partner or controlling parties who recognize these events must try to put an immediate stop to them. This is when you need to fully rely upon the precise terms for dissolution of the business that should have been made a core part of the firm’s fully executed operating agreement.

To obtain help with handling all of your Georgia business planning needs, please contact the Law Offices of Shane Smith today.  You can schedule your free initial consultation with a knowledgeable Peachtree City estate planning attorney by calling: (770) 487-8999.


Shane Smith
Advocate for the Seriously Injured in Georgia