Avoid A Costly Business Divorce

May 6th, 2014 - Bryan L. Page

It is not unusual for business partners to have disagreements. Ideally, the people are able to resolve their differences and continue on successfully in business together. However, sometimes the issues are unable to be resolved. If the business is a small, closely held business with just a few owners, the business typically suffers and can ultimately go close down or be sold. Lawyers are often needed to resolve complex legal and financial issues that arise in these situations. Some lawyers refer to these types of cases as business divorces. Business divorces can happen with any type of business organization, including partnerships, corporations, or limited liability companies.

These cases can require a lot of work by attorneys, and therefore can be expensive for all parties. At worst the business has no value and the parties are arguing over very little. At best, the attorney fees spent by all sides can eat up a lot of profit the business partners have worked hard to build up in the business. However, a few simple tips can make resolution of disputes and business divorce cases easier and less costly.

Proper formation documents

No matter what type of business entity, the owners should spend time adopting proper formation documents. This can include articles of incorporation (or formation), bylaws, and shareholder or member agreements. The complexity of these documents depends on the complexity of the business and its organization. If the business is a small, one or two person operation, simple forms can be prepared by an attorney or obtained from sites such as If the business is more complex, the owners will want to invest some time and money at the beginning to have a lawyer draft these documents and advise the owners of what terms are best for them. Investing in this type of legal advice at the outset and having clear direction on what is to happen when a dispute arises can help avoid costly litigation.

Proper accounting

Many disputes between business owners arise because one person accuses another person of taking money from the business or using money inappropriately. In these types of cases it is essential to have proper accounting practices and documentation in place. Being able to trace where and when money comes into and out of the business helps answer many financial questions. Business owners should seek the help of a good accountant early on to help set up good accounting methods.

Proper communication

Many business divorce cases turn into hotly contested legal battles because communication between the parties broke down. Before entering into a business relationship, the parties need to clearly discuss and communicate the nature and direction of the business and be on the same page. This should not stop after the business is finally opened. Clear and open communication needs to be on-going. If issues arise, do not let them simmer only to have them boil over later. Address them and try to work out differences and move forward. Maintaining good communication can help avoid hatred and distrust that can fuel costly litigation.

Disclaimer: This article and blog are intended to inform the reader of general legal principles applicable to the subject area. They are not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

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