Can my business partner force me to sell or push me out of the company?
When partners start a business, many fail to consider what will happen if there is some sort of fracture in the relationship. We’ve seen many clients ask what they can do – or what might happen to them – when they and their partners or investors are no longer aligned.
This highlights the importance of the agreements that govern the business entity. Whenever anyone forms a business entity, most states require governing agreements that lay out the rights and responsibilities of the investors. For an LLC, this is typically called an operating agreement. When you form a corporation with shareholders, the governing rules are found in the Articles of Incorporation and Shareholder Agreements.
These types of documents are often called “governing agreement” because they set out how an entity will be governed by addressing, for example:
- The duties and powers of each investor
- The profit distribution
- Rules around transferring or selling ownership interests
- Who has the power to appoint or remove officers
In many cases, the entity was formed using language from a template without contemplating your specific situation. While a partner may not be able to force you out, there may be other provisions in these agreements that limit your ability to fully participate in the upside. For example, a wealthier partner could control profit distributions and keep all the money within the company.
But your first step in any dispute should be to review the rules that govern your relationship, and these are usually in the governing documents. More importantly, you should consider these documents when starting your venture, because being thoughtful today is cheap insurance for tomorrow.