Business Divorce: How to Dissolve a Partnership or LLC When Relationships Break Down

When Business Relationships Become Untenable

Business partnerships and LLCs often begin with optimism, shared vision, and strong personal relationships. However, when those relationships break down, continuing the business partnership can become impossible. Understanding the process of “business divorce”—dissolving partnerships or LLCs when relationships fail—is essential to protecting your financial interests.

What Is Business Divorce?

Defining Business Divorce

“Business divorce” refers to the process of ending business relationships when partners can no longer work together effectively. This can involve:

• Dissolution of partnerships or LLCs
• Buyout of one partner’s interest by other partners
• Judicial dissolution ordered by a court
• Negotiated separation and division of assets
• Forced sale of the business with proceeds divided

Generally speaking, business divorce shares many characteristics with marital divorce: high emotions, financial complexity, disputes over value and entitlements, and the need to divide shared assets.

Why Business Divorces Occur

Common catalysts include:

• Fundamental disagreements about business direction
• Loss of trust between partners
• One partner not contributing fairly
• Financial misconduct or mismanagement
• Personal conflicts that spill into business
• Deadlock on major decisions
• Desire by one partner to pursue other opportunities
• Retirement or changing life circumstances

The Legal Framework for Partnership and LLC Dissolution

Partnership Dissolution

Generally speaking, partnerships can be dissolved in several ways:

By Agreement – Partners mutually agree to dissolve and wind up the partnership.

By Partner Action – In partnerships at will (no specific term), any partner can force dissolution by expressing intent to dissolve.

By Judicial Decree – Courts can order dissolution when warranted by partner misconduct, deadlock, or other grounds.

By Operation of Law – Certain events automatically dissolve partnerships (death of partner in some circumstances, illegality of business, etc.).

LLC Dissolution

Typically, LLCs can be dissolved through:

Voluntary Dissolution – Members vote to dissolve according to operating agreement provisions.

Administrative Dissolution – State dissolves LLC for failure to file required documents or pay fees.

Judicial Dissolution – Courts order dissolution based on member petitions showing appropriate grounds.

Operating Agreement Provisions – The operating agreement may specify dissolution events or procedures.

The specific rules depend on state law and the governing documents (partnership agreement or LLC operating agreement).

Alternatives to Full Dissolution

Buyout of Departing Partner

Often the preferred solution is one partner (or group of partners) buying out the departing partner’s interest. This allows the business to continue while separating the parties.

Key buyout issues:

• Valuation – What is the fair value of the departing partner’s interest?
• Payment terms – Lump sum or installment payments?
• Valuation date – When is value determined?
• Discounts – Are minority or marketability discounts applied?
• Continuing liabilities – Who remains responsible for business obligations?

Buyouts can be voluntary (negotiated between parties) or involuntary (court-ordered when one party refuses reasonable buyout terms).

Partition and Sale

In some cases, specific business assets can be divided between partners:

• Real property owned by the partnership
• Separable business lines or divisions
• Equipment and inventory
• Intellectual property

This works best when assets can be cleanly divided without destroying business value.

One Partner Buys the Business

One partner may purchase the entire business, buying out all other partners. This requires:

• Sufficient capital or financing to purchase others’ interests
• Agreement on business valuation
• Clean transfer of ownership
• Release of selling partners from liabilities

The Dissolution and Winding Up Process

Valuation: The Central Dispute in Business Divorce

Why Valuation Matters

Business valuation is typically the most contentious issue in business divorce. Whether the outcome is:

• Buyout of one partner’s interest
• Court-ordered sale
• Division of assets
• Dissolution with liquidation

The value of the business determines each partner’s financial outcome.

Valuation Approaches

Business valuation experts typically use one or more approaches:

Income Approach – Values the business based on projected future earnings and cash flow.

Market Approach – Values the business by comparison to similar businesses sold in the market.

Asset Approach – Values the business based on net asset value (assets minus liabilities).

The appropriate approach depends on the business type, profitability, assets, and other factors.

Valuation Disputes

Common valuation disputes include:

Valuation Date – Should value be determined as of dissolution date? Date of misconduct? Trial date?

Minority Discounts – Should a minority partner’s interest be discounted because they lack control?

Marketability Discounts – Should interests be discounted because they’re not readily marketable?

Goodwill – How should goodwill be valued? Is it personal to certain partners?

Methodology – Which valuation approach is most appropriate?

Assumptions – What assumptions about growth, earnings, or market conditions should apply?

These disputes can result in wildly different valuations from competing experts.

The lawyers at Melmed Law Group work with experienced business valuation experts to establish fair value for your partnership interest. Melmed Law Group takes on these cases on contingency, ensuring you can pursue fair value without upfront legal costs.

Grounds for Judicial Dissolution

Courts can order partnership or LLC dissolution on various grounds:

Misconduct by Partners

Generally speaking, courts may order dissolution when partners engage in:

• Willful or persistent breach of partnership agreement
• Conduct making continued business impracticable
• Breach of fiduciary duties
• Mismanagement or waste of business assets
• Fraud or dishonesty in business dealings

Deadlock

When partners cannot agree on essential business matters and deadlock prevents effective operation, dissolution may be appropriate.

Deadlock indicators:

• Repeated failed votes on major decisions
• Inability to agree on business strategy
• Blocked appointments of management
• Operational paralysis

Business Not Economically Viable

Courts may order dissolution when:

• The business cannot operate profitably
• Business purpose has become impossible
• Economic circumstances make continued operation futile
• Partnership is incurring ongoing losses

Oppressive Conduct

When majority partners engage in oppressive conduct toward minority partners (excluding them, denying distributions, self-dealing), dissolution may be warranted.

Other Equitable Grounds

Courts have broad discretion to order dissolution when equity requires it to protect partners’ interests.

Financial Complexity in Business Divorce

Hidden Assets and Financial Misconduct

Business divorce often involves allegations of hidden assets or financial misconduct:

• Unreported income
• Diverted business opportunities
• Excessive compensation to one partner
• Personal expenses charged to business
• Assets transferred to related entities
• Hidden bank accounts or investments

Forensic accounting may be necessary to uncover financial misconduct and determine true business value.

Complex Business Structures

Many businesses have complex structures that complicate dissolution:

• Multiple related entities
• Separate real estate holdings
• Intellectual property in different entities
• Family members involved in business
• Intercompany transactions and loans

Unwinding these structures requires sophisticated financial and legal analysis.

Tax Consequences

Business dissolution has significant tax implications:

• Recognition of gains or losses
• Recapture of depreciation
• Distribution of appreciated property
• Allocation of liabilities
• Impact on ongoing business entity taxation

Tax planning during dissolution is essential to minimize adverse tax consequences.

Why Contingency Representation Matters for Business Divorce

The Financial Strain of Partnership Breakdown

When partnerships break down, financial resources are often strained:

• Business may be losing money or declining
• Partners may have stopped taking distributions
• Cash flow problems may exist
• One partner may control financial resources
• You may have lost salary if excluded from business

In this environment, paying $200,000 to $600,000 in hourly legal fees is often impossible.

The Power Imbalance Problem

Business divorce often involves power imbalances:

• One partner controls the books and business operations
• Majority partners can access business resources
• One partner has personal wealth while others don’t
• The controlling partner can use business funds for legal fees

Negotiated vs. Litigated Business Divorce

Negotiated Resolution

When possible, negotiated resolution is preferable:

Advantages:

• Faster resolution
• Lower costs (though with contingency representation, cost is less of a concern)
• More control over outcome
• Privacy (no public court proceedings)
• Flexibility in structuring resolution

Requirements for negotiated resolution:

• Both parties willing to negotiate in good faith
• Reasonable agreement on valuation
• Trust that financial disclosures are complete
• Ability to reach compromise

Litigated Dissolution

When negotiation fails, litigation may be necessary:

When litigation is required:

• One party refuses to negotiate
• Fundamental disagreement on valuation
• Allegations of financial misconduct requiring discovery
• Need for court order to access records or assets
• One party making unreasonable demands
• Deadlock with no resolution possible

Litigation advantages:

• Court can order production of financial records
• Discovery can uncover hidden assets or misconduct
• Court determines fair value through expert testimony
• Formal remedies available (dissolution, buyout orders, receivership)
• Enforceable judgment with collection mechanisms

The lawyers at Melmed Law Group prepare for litigation while pursuing negotiated resolution when appropriate. The firm’s contingency model means you don’t pay more for litigation if it becomes necessary—the fee structure remains tied to results, not hours spent.

Protecting Your Interests During Business Divorce

Document Financial Information

Before relationships completely break down:

• Copy all financial records
• Document business assets and their location
• Record ownership of key assets
• Save communications about business matters
• Photograph inventory and equipment
• Secure access to electronic records

Preserve Evidence

Protect evidence of:

• Partner misconduct
• Financial irregularities
• Breach of duties or agreements
• Business valuation information
• Hidden assets or diversions

Secure Legal Advice Early

Consult with the lawyers at Melmed Law Group before the situation deteriorates further. Early intervention can:

• Prevent destruction or hiding of assets
• Establish your rights clearly
• Create leverage for negotiated resolution
• Preserve evidence before it disappears
• Position you for favorable outcome

Don’t Abandon the Business

Unless legally advised to do so, maintain your involvement:

• Continue attending meetings
• Monitor financial matters
• Document what’s occurring
• Assert your rights as partner
• Don’t give the appearance of abandonment

Common Mistakes in Business Divorce