As a business owner in Virginia, you may face hard choices. If a strong partnership starts to hurt the business, you have options. For example, the problem may be a partner who is not doing their share or who keeps making poor choices. In either case, there are legal steps you must follow.
In Virginia, you can usually remove a business partner only if you have a clear legal reason. The formal term for removing a partner is dissociation.
Check your governing documents
Remember to review your Operating Agreement (for LLCs) or Partnership Agreement. In Virginia, these documents typically outline specific procedures for removing a partner. Most well-drafted agreements will include specific “expulsion” clauses. They can allow for removal based on majority votes or trigger automatically in specific circumstances.
Specific misconduct or events such as a partner’s bankruptcy, criminal conviction or breach of agreement can be valid reasons for expulsion. However, if your agreement outlines a clear process, you must follow it precisely. This is to avoid a “wrongful dissociation” claim, which could lead to significant damages.
When there is no agreement
For partnerships, you may need to pursue judicial dissolution under Virginia’s Uniform Partnership Act. For LLCs, the Virginia Limited Liability Company Act provides similar judicial dissolution remedies.
If you do not have a written agreement, Virginia law may still let you ask a court to remove (dissociate) a partner. You can petition under Va. Code § 50-73.109(5) or § 13.1-1040.1(5) if the partner engaged in wrongful conduct, committed a material breach, or made it impractical to continue the business together. Furthermore, you may be able to do this without dissolving the entire business.
Alternative approaches
If direct removal is not feasible, you can consider other strategies. Here are some alternatives you can explore:
- Buyout negotiations: Offer to purchase your partner’s interest at fair market value, potentially avoiding costly litigation.
- Mediation: A neutral third party can help facilitate a mutually acceptable separation.
- Dissolution and reformation: You might dissolve the existing entity and form a new one without the problematic partner, though this approach has significant legal and tax implications.
Preserving your business
Removing a partner does not mean you automatically get their equity. Unless your agreement sets a different way to value the interest, the departing partner is entitled to the “fair value” of their share. This can be costly for the remaining owners, who may need to pay for the buyout.
Finally, the best way to protect your business is proactive planning. If you are forming a new business or do not have a comprehensive agreement, seek legal help immediately. You can work with a Virginia business law professional to draft provisions addressing partner removal and exit strategies.