In this week’s Freedom Friday blog and email newsletter, we’re continuing our new year series, “Top Six in 2026,” and we’re talking about the six most popular topics from last year’s Freedom Friday blog and email newsletter. These are the six most read blog articles from last year. Now, some of the blog posts that we’re covering were not first posted last year. Some of them were posted in a prior year, but were popularly read last year, specifically. In this week’s Freedom Friday blog and email newsletter, I’m talking about a topic that I first posted about in 2023. While it did not make the Top Five in 2025 list, this topic became popular last year, and it is the third most popular topic in the blog. In this week’s Freedom Friday blog and email newsletter, I’m answering the question, “What Should Your Small Business Do When a Business Partner Leaves?”
The issue of how to handle a departing business partner comes up in my practice with a lot of clients and prospective clients. Sometimes my client wants to leave the LLC or business partnership, and sometimes the other co-owner or partner needs to leave the business, or desires to do so. In either situation, the first issue is what does the governing document(s) say about a partner or co-owner departing the business. Before you start a business with someone else, you need to have a partnership agreement, especially if you are operating as a 50-50 general partnership, but also for a limited partnership. If you’re forming an LLC, you need to have an operating agreement which covers the same issues. At a minimum, your partnership agreement or operating agreement needs to address the transfer or discontinuation of the business, in the event one of the partners or co-owners decides to leave the business or is removed involuntarily. The partnership agreement or operating agreement should also include a statement that departing partners or co-owners are no longer financially responsible to the remaining partners or co-owners and should provide guidelines or directions on how the remaining partners or owners would assume assets and liabilities based on their respective percentage of ownership interest after the departing partner leaves.
In addition, when a partner or co-owner leaves a business, you need a bona fide separation agreement, documenting all these issues, and others, including the fact that the departing partner or co-owner must have his or her name removed from the operating agreement (if the business is an LLC), the articles of organization be amended, if necessary, and that the IRS be updated if the departing partner was the responsible party for the EIN. Also, if the departing partner or co-owner was the personal guarantor on a loan for the business, he or she may need to continue to function in that role, or a new arrangement be made with the lender.
It’s also important to understand that there are two different types of partnership or co-owner separations: separations which are contested (or involuntary), and those which are not. Uncontested (or voluntary) departures include retirements, deaths, disability, or incapacitation. In such cases, the partners or owners generally remain cordial and can work on the transition, plan ahead, and come to a mutual agreement. However, disputes can arise for several reasons, including differences of opinions between the partners or owners regarding management styles, loss of faith between co-owners, disagreement as to the terms of the departure (if it is planned), outstanding assets or liabilities, and issues with the operating agreement, bylaws, or partnership agreement regarding whether or not the departure is even permitted. Believe it or not, some LLC operating agreements and partnership agreements seek to bind co-owners or partners to the business organization and prohibit them from leaving the company. An attorney can get involved in attempting to remedy the situation without court intervention, but if that does not resolve the matter, judicial dissolution may be required, and civil damages may result from such a dispute.
Regardless of whether a departure is contested (involuntary) or not, your business needs to follow the governing document (partnership agreement, operating agreement, bylaws, etc.), and if any of the remaining partners or owners wish to remain in the business, there needs to be a buy-sell agreement for them to buy out the ownership rights and equity interest of the departing partner or co-owner.
Thinking about starting a small business? Or maybe your small business is having issues with contracts, leases, business partners, collection issues, or experiencing other barriers to growth? Please contact me at Jonathan@libertylegalok.com to schedule a FREE consultation.
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