IN A DISPUTE AMONG OWNERS OF A BUSINESS, CAN AN OWNER LEAVE AND START A NEW BUSINESS WITHOUT GIVING UP OWNERSHIP?

While all joint business ventures start out with the expectation of a long term relationship between its owners, unfortunately, too often this turns out not to be the case. Disputes among owners can arise for a variety of reasons, such as differences in opinion on key decisions or management style, changes in company goals or strategy, and personal issues or other commitments. Sometimes, these disputes rise to a level where leaving the company may be your best or only choice. However, if you leave, can you start a competing business? Can you do so without giving up your ownership? The business litigation attorneys of Brown & Charbonneau, LLP can help.

If you are a business owner seeking to leave a jointly owned business, Brown & Charbonneau, LLP can provide you with comprehensive assistance, including identifying and helping you understand your options, and ensuring that the necessary steps are taken to limit your liability and protect your rights as an owner.

WHEN CAN A PART-OWNER LEAVE AND START A COMPETING BUSINESS?

Generally, part-owners of a business, operated through a corporation or limited liability company, are free to leave and start a competing business. Often times, a corporation’s bylaws or an LLC’s operating agreement will contain specific provisions applicable to an owner’s withdrawal, including non-competition terms. However, courts in California, with certain statutory exceptions, have generally not been favorable to the enforcement of non-competes, and even under the best of circumstances these agreements are enforced only if they are very narrowly tailored. In all situations though, any entity formation and other agreements among the owners must be carefully analyzed in order to determine what duties and obligations are owed upon withdrawal of an owner, and the enforceability of any restrictions on competition.

On the other hand, for cases involving a business operated through a partnership, the existence of a non-competition clause in a partnership agreement or other agreement between the partners may preclude a partner from leaving the partnership and starting a competing business. This is because while the enforceability of non-competes may be triggered upon the disposition of any ownership interest (whether it be corporate, LLC or partnership) an owner of a partnership must dispose of his or her interest in order to relieve themselves from liability for partnerships acts or obligations arising subsequent to their withdrawal. This may be avoided however in that a partner’s withdrawal may also cause the mandatory dissolution of the partnership itself. For these reasons, as with other entity forms, any partnership agreement, or other written agreements among the partners, must be thoroughly analyzed.

When a part-owner of a business does leave and start a competing business, special care must also be taken to ensure that protected propriety or other confidential information are not brought or used unlawfully. Depending on its nature, certain information of the business, including customer lists, may constitute trade secrets of the business, prohibited from any unauthorized use or disclosure. This may be the case even with information or customers the withdrawing owner developed or retained. The business litigation attorneys of Brown & Charbonneau, LLP can assist you in complying with any trade secret protections, while making sure that you leave the company with all that you are lawfully entitled to.

CAN THE PART-OWNER RETAIN THEIR OWNERSHIP INTEREST?

Where a part-owner of a business, operated through a corporation or limited liability company, is permitted to leave and start a competing business, they may generally do so while retaining their ownership interest. Indeed, a sale of such ownership interest may actually trigger enforceability of any non-competition agreement entered into with the company or its owners. In addition, if the owner is also a director or officer of the company, these positions must be resigned, directors and officers owing fiduciary duties of loyalty and care to the company and its owners in irreconcilable with competition with the company. Resignation of these positions is also necessary to protect the owner from liability for company acts or obligations arising subsequent to his or her withdrawal. Furthermore, efforts should be made to limit or eliminate exposure under personal guarantees and other contractual agreements entered into by the departing owner prior to his or her withdrawal, by “separation agreement” or other negotiated comprise with the company and its remaining owners.

As discussed, for businesses operated through a partnership, a departing partner must dispose of his or her partnership interest in order to be relieved from liability for partnerships acts or obligations arising subsequent to their withdrawal. Any partnership agreement must be carefully reviewed as they often provide for rights of first refusal to the partnership or remaining partners, or other restrictions on third-party sales. As with other entity forms, a “separation agreement” other negotiated comprise with the partnership and the remaining partners should also be sought by the departing partner.

GETTING LEGAL HELP

Whether you are a business owner seeking to leave the company, or the company or owner facing the withdrawal of a co-owner, you need the best legal help possible. Brown & Charbonneau, LLP represents individuals as well as large and small companies in all forms of business disputes and owner withdrawals. To learn more about the legal services we can provide, give us a call today toll free at (866) 237-8129 or contact us online to speak with our California business litigation attorneys with the skills and experience to provide the legal advocacy you need.