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Running a business is challenging, especially when your partner decides to leave the business. There are many reasons why this can happen. For example, you may have found a partner only to discover that you do not work well together. Alternatively, you may have formed a strong partnership, but your partner no longer has time to run the business. Whatever the reason, it is essential that you take the proper steps to continue the business without them. This article will set out the steps you should take if your co-founder or partner leaves your business.

Type of Business

First, you need to consider the structure of your business. This is because the structure will have a significant impact on the process of leaving the business. There are two common business structures partners use. 

Partnership

If your partner leaves your business, you will need to terminate the partnership. This is because you need two or more people to form a legal partnership. Once you end the partnership, you can start a new partnership with other partners or continue as a sole trader.

If your business has a partnership agreement, you should follow the procedure set out in the agreement. For example, your partnership agreement may require the leaving partner give 30 days written notice to the other partner of their intention to leave.

If your business does not have a partnership agreement, the steps you and your partner will need to follow are in the Partnership Act. This Act varies between states and territories, so you should follow the one that applies to you.

For example, the Partnership Act 1892 (NSW) governs partnerships in NSW. This Act requires the leaving partner to notify the other partners of their intention to leave the business.

Your partnership will be officially terminated either on receipt of the notice or, if the notice specifies a date of termination, on that date. You will need to cancel your current ABN and re-apply for a new ABN as a sole trader, or as soon as a new partnership forms.

In most cases, your partner will be entitled to their proportion of the business’ value, including the partnership’s assets and profits, less the partnership’s expenses and debts.

Company

If you are running your business as a company, you need to follow the process in the Corporations Act 2001. You should also follow any specific company procedures.

You should first review your company’s constitution and shareholders agreement to determine any specific requirements applicable to your co-founder withdrawing. For example, you should follow the process for selling your co-founder’s shares set out in the agreement or constitution.

Most companies provide preemptive rights to existing shareholders. This means the person wanting to leave the company will need to offer their shares to the remaining shareholders. Shareholders have the option to waive their preemptive rights. If all of the shareholders do this, then the leaving shareholder can offer the shares to a third party. Depending on your shareholders agreement, you may need to approve this third-party purchase.

If your co-founder’s shares were subject to vesting and they have not vested, the company will need to buy the shares back. This is also the case if your shareholders agreement has leaver provisions, which require a leaving shareholder to sell their shares back to the company. Once all of the shares have been sold, the leaving shareholder will need to resign as a director by providing the company with a director’s letter of resignation.

To remove your partner as a shareholder and director, your company will need to: 

  1. prepare a share transfer form and new share certificates;
  2. prepare minutes and resolutions to approve the transfer;
  3. update the members’ register; and
  4. update the information on ASIC by completing a Form 484 within 28 days of the partner leaving.

Once you have completed these steps, your partner will no longer be part of the company.

Key Takeaways

You should be prepared in the event your co-founder or partner leaves your business. It is essential you follow the correct steps, depending on whether your business runs as a partnership or company. This is to ensure the smooth exit of your partner or co-founder so you can continue your business without interruption. If you have any questions, get in touch with LegalVision’s business lawyers on1300 544 755 or fill out the form on this page.

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