MEMBER NOTES
MEMBER NOTES
Business Divorce in New Jersey : A Primer
By : Kevin J . O ’ Connor , Esq . and David Polazzi , Esq .
When the principals of a newly formed partnership , closely held corporation , or limited liability company ( LLC ) launch their venture together , it is often accomplished without proper documentation . Ideally , that business grows far beyond the wildest expectations of the parties when they launched , years prior . But this is often the point where “ trouble in paradise ” develops among the principals . Analogous to the circumstances underlying a divorce between marital partners , over time the principals may develop differences in how to best manage and operate this business . This leads to a rude awakening when they are told that their written agreement fails to provide what is needed to ensure a smooth and swift resolution of disputes . And , at times , those differences and disputes cannot be peacefully resolved , and the principals need to go their separate ways .
Over the course of decades , New Jersey ’ s Legislature has incrementally adopted a comprehensive , but complex , patchwork of laws designed to set what can best be described as the “ rules of the game ” for business participants . Over that same period , New Jersey ’ s courts have been asked to provide judicial interpretation of those laws , and they have delivered scores of cases that reveal the broad contours of the “ rules of the game .” This article provides a primer of the various considerations for principals of closely held businesses should a breakup be inevitable .
The Common Forms of Closely Held Businesses
Closely held businesses usually take one or more common forms , and the laws applicable to each can differ substantially . A general partnership is a type of business organization in which two or more individuals pool money , skills , and other resources . Likewise , they share profit and loss in accordance with the terms of their written or oral agreement . A partnership is assumed to exist where the participants in an enterprise agree to share the associated risks and rewards proportionately . Many people are surprised to learn that they have been operating as “ partners ” with someone with whom they have enjoyed an informal business relationship that turned into a genuine opportunity .
A corporation is an entity that is separate and distinct from its owners and is owned by them
Kevin J . O ’ Connor , Esq . is Certified as a Civil Trial Attorney by the New Jersey Supreme Court and is a shareholder and Chair of the Business Litigation Practice , and Vice Chair of the Labor & Employment Practice at Peckar & Abramson , P . C . (“ P & A ”). He is the author of the New Jersey Business Owner Rights blog , available at www . pecklaw . com . P & A is a national , full-service law firm located in River Edge , New Jersey .
as stockholders / shareholders . As such , upon formation of that legal entity and registration with the state , stockholders share in profits and losses generated through the company ’ s operations . A limited liability company or LLC is a business that allows one or more persons to organize in such a way that their liability is limited to their investment in the company . The members are able to enjoy the single taxation feature of a partnership or sole-proprietorship firm , and they can decide upon the distribution of profits and tax benefits .
It is sometimes the case that businesses operate using more than one of these legal forms for different aspects of their business ( i . e ., use of a corporation for an operating company , and use of the LLC form for the real estate ). Many clients are surprised to learn that one can claim ownership in an LLC or corporation even without the issuance of a formal stock or member certificate , provided there is some indicia of ownership such as a course of dealing or corroborated promises of ownership and reliance thereon .
David Polazzi is Senior Counsel in P & A ’ s New Jersey office where he is Vice Chair of the Real Estate and Corporate Law Practice Groups .
Duties of the Business “ Owner ”
In each scenario outlined above , business owners , no matter the business structure , owe duties to one another while the relationship is ongoing . Also , they have duties during any wind down of the business . The nature and types of duties are far too broad to outline here . Simply put , you can become personally liable if you are not careful how you treat your fellow business owners . For example , New Jersey has a comprehensive set of laws applicable to each form of ownership which protects participants from oppression or other illegal activity by other participants . Even where a business has been operating for years without a formal partnership / shareholder / LLC operating agreement , the law may impute legal obligations to the participants of that business .
Some “ Do ’ s ” and “ Don ’ t ’ s ” Before Heading for the Exit
Before heading for the exit there are some considerations to keep front of mind . First , hire competent counsel with experience in this practice area . Do not hire a general practitioner who “ just dabbles ” in this area . You will end up paying more in the end . When hiring counsel , ask for the attorney ’ s actual experience litigating these cases . Second , organize your files , and pay close attention to any agreements you have , and
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