What Happens When a Business Owner Wants Out?
When the co-owner of a business is considering options for exiting the business arrangement, the decision can be clouded by uncertainty. Often the organizational documents of the entity will set out the process and procedures a business co-owner must take in order to exit the business. In the case of a corporation, this information may be found in the by-laws or a shareholders’ agreement. In the case of a limited liability company, this information may be found in the operating agreement. In general, there will be four options for a business co-owner who wants to exit the business.
One option is to have the exiting owner’s ownership interest be purchased by the remaining owners of the company. The organizational documents for the company will often set out the terms and conditions under which this kind of buy-out may occur. However, if there are no documents in place or the documents are silent, then the parties will have to voluntarily reach the terms of an agreement.
A second option is for the company itself to redeem the ownership interest of the exiting owner of the business. A redemption is the purchase of an owner’s ownership interest directly by the company itself, instead of a purchase by a remaining owner.
A third option is to have the exiting owner’s interest in the company purchased by a third party. The exiting owner needs to be aware that there may be restrictions on a sale to a third party contained in the company’s organizational documents.
A fourth option to exit the business is to dissolve the entire business entity. When a business dissolves, the assets are liquidated to pay creditors, and any remaining assets of the business are distributed among the owners. Often, the organizational documents will set out under what circumstances a dissolution may occur, who can request a dissolution of the business and what process the business must undertake to accomplish the liquidation of the business assets and settling of accounts.
Business owners should be aware that these will be the typical options available to a business co-owner for separating from a business when a co-owner no longer wishes to be involved. However, each business owner’s situation is unique and business owners should consult their own attorney for advice on the available options in their situation.