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If you own a business with partners or shareholders, you should know what to do and what to expect when someone leaves the business. What happens will depend on the business’ legal structure and the agreements you have in place. This article will explain what happens when a business partner or shareholder chooses to leave the business. It will also explain the agreements you should have in place for any departures.

My Business Partner Wants to Leave Our Partnership

A partnership structure can involve two or more or partners. Usually, you create a partnership through a written partnership agreement. This agreement usually outlines the process you should follow if a business partner chooses to leave the partnership.

However, if you do not have a formal partnership agreement, you can find the default procedures in your state or territory’s partnership legislation. Generally, the legislation requires the departing partner to provide written notice of their intention to depart the partnership. Once the business partner leaves the partnership, the partnership will be dissolved or technically dissolved.

Technically Dissolved

If a partnership is technically dissolved, the business can continue operating as a reconstituted partnership. Technical dissolution can arise when the existing and new partner(s) take over the assets and liabilities of the partnership with no break to the day-to-day running of the business.

The main benefit of technical dissolution is that it allows the business to continue running without having to obtain a new Australian Business Number (ABN). In that sense, the business itself can keep running as normal, despite the departure of a business partner.

Dissolution

In circumstances where there are only two business partners, and one gives notice to the other partner to exit the partnership, that departure would amount to dissolution of the partnership.

If the departure of a business partner amounts to a dissolution, your business will need to follow the procedure in the partnership agreement or relevant partnership legislation to appropriately dissolve the partnership. You can also draft a deed of dissolution to outline the terms of the dissolution. This includes how any assets held by the partners are to be distributed between them.

A Shareholder Wants to Leave My Company

In proprietary (or private) companies, your shareholders or members own your business. A company is a separate legal entity. This means that if a shareholder leaves the business, the business can continue operating as normal, provided the company retains at least one shareholder and one Australian-resident director. However, you must meet certain administrative and legal requirements when a shareholder wishes to leave a business, including:

  • the board of the company must usually approve the sale. This will be in accordance with the company’s shareholders agreement, constitution or the replaceable rules in the Corporations Act;
  • the shareholder may need to sell their shares under the company’s shareholders agreement. Usually, they will have to offer their shares to all other shareholders first before offerring to external third parties;
  • if the shareholder sells their shares to a third party, this may require the approval of the company or the other shareholders;
  • updating your share register if you have a company;
  • cancelling the previous share certificate (companies); and
  • for companies, notifying the Australian Securities and Investment Commission (ASIC) of any changes to the company’s shareholder composition.

However, it is important to remember that every situation varies. Your requirements may differ depending on your circumstances.

Key Takeaways

The effect of a business partner departing your business will depend on the structure of your business, specifically, whether you operate a business partnership or company. If a business partner leaves your partnership, your partnership may be dissolved or technically dissolved. If a business partner (or shareholder) departs your company, you can continue operating as usual. However, you will need to comply with legal and administrative requirements to ensure the departure is properly executed and documented. If you have any questions about an exiting partner or shareholder, get in touch with LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

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