Easily the most common things we see in business breakups is that the parties were not represented by their own counsel in the formation of the partnership. More often than not, the scenario is that one of the partners hires a lawyer to draft the partnership agreement. What the other partners do not realize is that this attorney is not representing them individually.
Depending on how the attorney was hired, he is either representing the partner that hired him or possibly the new potential entity. In either scenario that attorney could not represent the other partners in their individual capacity because there is a conflict of interest. That’s not to say that the attorney drafting the agreement is not capable of drafting a fair partnership agreement, but the other partners must understand that they are going into the transaction not represented.
Of course cost is often a deterrent in not wanting to retain individual counsel from the offset, and that is certainly understandable. But keep in mind, in the event that the partnership does go south, you will have no option but to retain counsel. Representation during the partnership break up will be far more costly than what it would have been had you retained counsel to help negotiate the agreement.
If you choose to go into the transaction not represented by counsel, than you must thoroughly review the partnership agreement and all relevant documents. Do your best to work through the different scenarios in the event things go south and what the best way to amicably resolve the matter would be.
In that Tarrant County Case, although the parties hired an attorney to draft all of their corporate documents. Neither retained private counsel. As a result the methods for terminating their partnership were not very well suited for their particular type of business and did account for certain issues that they faced.
The first thing that always comes to everyone’s mind is to just liquidate everything and everyone takes their proportionate share and moves on. While this may seem like a great idea, it’s never this simple. Winding down a business is very complex and it touches on many different areas of law. First of all, the entity exists separately from the partners. Just because one partner wants to leave the LLC or the LP does not mean he can just force it to shut down. The partner still has a duty of loyalty to the business and the other partners.
Second the tax consequences for liquidating and winding up a partnership or an LLC can be severe. If this is the option that you choose, you must consult a CPA and determine if you can afford the tax liability. If you can afford it, then in many cases this will be the best option to get everything wrapped up so you can move on with your life. Secondly depending on the property that the partnership owns, liquidating a straight liquidation can be tricky.
Another problem that can arise is lots of times the assets aren’t really the kind that can just be liquidated. For instance, let’s say in our hypothetical example that the the partnerships only meaningful assets are service contracts. The partners thought that they could just divide up those service contracts evenly between each other and start their own separate company. The problem that arose was that many of the clients did not like the partner that that they were assigned and were understandably less than thrilled to be in the middle of a nasty breakup. In this situation many of the clients canceled their service contracts and signed with the competitors. Obviously this will cause the value of the business to go down significantly.