In an ideal world, every co-owner, member, or partner would be on the same page about every major decision related to the business, but in reality, disagreements are all too common. Perhaps your partners originally agreed with your long-term vision for the business, but your views have diverged, and it is time for your or someone else to leave the company. This is called dissociation. Having a robust and thorough partnership agreement in place makes this process as painless as possible.
Wrongful Dissociation
Sometimes, a business partner wrongfully dissociates from the business. In California, a business partner is considered to have wrongfully dissociated from the partnership if he or she:
- Breaches one or more terms of the partnership agreement;
- Dissociates prior to the expiration of the partnership’s term (if the partnership had a definite term or specific undertaking);
- Becomes a debtor in bankruptcy proceedings; or
- Is dissociated from the partnership due to a judicial order.
Business partners in California who wrongfully dissociate are liable to the other business partners (and partnership) for damages on top of other obligations and responsibilities. In rare cases, a wrongfully dissociated partner might be responsible for debts and liabilities incurred in the two years after dissociation as well.
Legitimate Dissociation
More often, a business partner who wishes to dissociate does so through legitimate means. A few ways this can happen include:
- He or she notifies the partnership of an intent to dissociate at a later specified date;
- The other partners’ unanimous vote to dissociate the partnership; or
- A triggering event outlined in the partnership agreement occurs.
An important note is that business partnerships with only two partners are dissolved if one partner dissociates. This means the company’s assets must be liquidated. Generally, partnerships with more than two partners must buy out a dissociated partner’s share unless the business dissolves anyway. If the dissociation was wrongful, the partner might lose certain rights associated with the buyout of his or her interest in the partnership. Dissociated partners lose any voting rights in the partnership and typically forfeit any management authority in the enterprise too.
If the partnership agreement for your business is well-negotiated and thorough, the risk of wrongful dissociation becomes greatly diminished. Should one partner decide to leave to try other business ventures or pursue other opportunities, California law covers dissociation procedures in the absence of a partnership agreement, but it is always a good idea to have one tailored to your business.
Integrated General Counsel is well-equipped to help businesses at any stage of their life cycle and has helped numerous partnerships start, grow, and change over time. If you need help navigating the terms of your partnership or bringing it to a close, give us a call to (925) 399-1529 to discuss your options.
- California Government Fights Fee Collection - April 23, 2024
- California’s Stance on Noncompete Clauses - April 23, 2024
- Simplifying Cal/OSHA Workplace Safety in California - March 4, 2024
