Exiting a company as a partner can be complicated, requiring a thorough review of your contract. You’ll also need guidance from an experienced legal professional to determine potential roadblocks and consider solutions.
Review Your Contract’s Exit Terms
Business partnership contracts are often carefully written to address common issues, such as disputes, share vesting, and exit strategies. By reviewing your partnership agreement with a business law attorney, you can identify your options and take action. Leaving may require a vote from the other partners in one of the following ways:
- The majority of the partners agree.
- All of the partners agree.
- Two-thirds agree.
- A majority-in-interest of partners agree.
A majority-in-interest means the voters together must own at least half of the company, according to the Texas Business Organizations Code (TBOC) Section 11.057. This may be half the ownership or half the profits of the partnership. If you have an agreement, it may state other terms for vote requirements.
By reviewing your partnership agreement with a business law attorney, you can identify your options and take action before making any moves.
Document Everything
Because the law is very important in your exit, you should keep a record of all conversations and actions. Keeping written or electronic notes of your talks and the other partners’ replies helps you create a clear timeline for negotiations or court. It also lets everyone agree on or correct facts and numbers.
Determine Your Assets, Liabilities, and Buyout Method
Before you start negotiating your buyout, you need to understand any responsibilities you have to the company. Your name might be on leases, purchase contracts, loans, or credit lines.
You could also be listed on tax forms, so your separation agreement should include a clause protecting you from those obligations. You’ll also need to figure out how much of the company’s assets belong to you as part of your buyout.
The method and calculation for buyout of your interest will likely be included in the original agreement; however, it is important to have your legal and, perhaps, accounting teams review these terms. Depending on its income and the provisions in the agreement, the company may pay you over a period of months or years. You can make your exit smoother by being willing to compromise, but make sure to write down all talks so everything stays clear. If it’s hard to agree on a buyout, you might use procedures under the Texas Alternative Dispute Resolution Procedures Act, such as an agreed mediation, to help solve it.
Craft Your Separation Agreement Carefully
Your separation agreement will list everything you will get and any final responsibilities for you or the company. Even if you are leaving on good terms, remember the business must protect itself, so you need to protect yourself. Your business lawyer will help you negotiate these points in your separation agreement:
- The price paid for your ownership share
- The payment terms
- How to dispose of assets and liabilities with your name
- Removal of your name from contracts, personal guarantees, and other obligations
- A material breach clause in the event the company doesn’t pay your full share
- An indemnity clause releasing you from any future lawsuits against the company
- A clause providing security interest for outstanding debts that must retain your name
- A clause allowing you the right to audit the company’s books if your payout is structured over time
Signing your exit papers can be even more important than the ones you signed when joining the partnership. You need to fully separate yourself from any future legal problems the company might face. With careful review and help from a trusted business law firm, you can leave your partnership safely and avoid unwanted issues.
Your separation agreement should clearly outline everything you will receive and any final responsibilities, so you can protect yourself as the business protects itself.
File Legal Documents Required by Texas
The Texas Business Code outlines how different types of companies should file new documents indicating ownership changes. While there is no requirement for most partnerships to file a notice with the Texas Secretary of State (SOS) when a partner withdraws, it can be useful to submit a Form 424 – Certificate of Amendment. However, if the company is a Limited Partnership (LP), this form is required to update its Certificate of Formation.
If necessary, the company must also file a Form 401 – Change of Registered Office/Agent to update the registered agent information. If the LLC’s responsible party for taxes changes when you leave, the company must file Form 8822-B with the Internal Revenue Service (IRS).
Close Out Your Connections to the Company
While not legally mandated, you should contact clients, customers, vendors, and creditors of the change. You can communicate with them directly to confirm company decisions that affect them, and you may also choose to make a general announcement.
File your final tax returns showing your partnership income and Texas sales and use tax information. Remove yourself from bank accounts, lines of credit, credit cards, loans, and other assets controlled by the company.
Texas Business Law Takes Over if You Don’t Have a Partnership Agreement
Texas doesn’t require companies to use partnership agreements. You can reference your company’s operating documents, but if you have no formal contract, your exit must proceed under the Texas Business Organizations Code (TBOC). This is one area where working with a business law attorney can be highly beneficial.
If you want to leave your business partnership—or if the company is trying to push you out—you need an experienced lawyer to protect your interests. At Feldman & Feldman, our Houston business lawyers have been helping people and companies since 2015. Contact us to schedule a consultation and learn how we can help you leave a business partnership in Texas safely.