What happens if my business partner or co-owner wants out?

Disagreements among owners are one of the matters listed on our business law page, and they are easier to manage when everyone knows the rules before positions harden. California's Corporations Code sets default rules for each type of business, and most of them give way to what the owners signed. This page walks through those defaults for general partnerships, limited liability companies (LLCs) and corporations, and the facts that change them.

How does a co-owner's exit usually unfold?

1. Find the documents. Collect the partnership agreement, the LLC operating agreement, or the corporation's articles, bylaws and any shareholder or buy-sell agreement. These often set the notice an owner must give, how the price is set and how it is paid.
2. Confirm what kind of business it is. An LLC or corporation exists because it filed with the Secretary of State. Two or more people who carry on a business together as co-owners for profit form a partnership whether or not they intend to (Corporations Code section 16202(a)), so a business with no filing at all may be a general partnership. If you never signed anything, our page on whether a verbal business agreement is enforceable in California explains how oral terms are proved.
3. The departing owner gives notice. In a general partnership, a partner is dissociated once the partnership has notice of the partner's express will to withdraw, or on a later date the partner names (Corporations Code section 16601(1)). Put it in writing so the date is clear.
4. Value the interest and negotiate. Most exits end in a negotiated buyout. If the agreement has a valuation formula, it usually controls; if not, the statutes below supply a standard.
5. If talks fail, the statute takes over. A partnership must pay its estimate of the buyout price within 120 days after a written demand if no deal is reached (section 16701(e)). In an LLC or corporation, an owner may file an action for judicial or involuntary dissolution in superior court, and the other owners may elect to buy that owner out instead (sections 17707.03 and 2000).
6. Update the public records. After the exit, the company's filings with the Secretary of State and any fictitious business name statement with the county may need to change, and the tax and filing duties of the company continue until it is formally ended.

How do the default rules compare by type of business?

The table summarizes the default rules when the owners' agreement says nothing different. The sections cited are all in the California Corporations Code.

What changes the answer?

What your written agreement says

A partner may be dissociated by an event the partnership agreement specifies, or expelled under its terms (section 16601(2) and (3)). An LLC's judicial dissolution grounds start with whether it is reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement (section 17707.03(b)(1)). For corporations, the buyout rule in section 2000(a) applies "subject to any contrary provision in the articles," which may refer to a separate written agreement among shareholders about buying shares. In short, a well-drafted buy-sell clause can replace much of what follows. Our article on protecting your business with strong contracts covers the clauses that tend to matter.

Whether the departure is wrongful

A partner's dissociation is wrongful if it breaches an express term of the partnership agreement or, in a partnership for a definite term or particular undertaking, happens early by withdrawal, judicial expulsion or bankruptcy (section 16602(b)). A partner who leaves wrongfully is liable for the damages caused (section 16602(c)), those damages are offset against the buyout price (section 16701(c)), and payment may be deferred until the term ends unless a court finds earlier payment will not cause undue hardship to the business (section 16701(h)). An LLC member who withdraws in breach of the operating agreement is likewise liable for the damages caused (section 17706.01(b) and (c)). In an LLC or corporation, damages from a moving owner's breach of an agreement may be deducted from the buyout price, but an LLC member who sues on the abandonment, deadlock or misconduct grounds is not liable for breach of contract damages for bringing the action (section 17707.03(c)(1)), and the corporate deduction does not apply when the ground is misconduct by those in control (section 2000(a)).

The size and makeup of a corporation

Section 1800(a) limits who may file for involuntary dissolution: one-half or more of the directors, shareholders holding at least 33 1/3 percent of the shares or equity (excluding shares of anyone who took part in the alleged misconduct), any shareholder of a close corporation, or others named in the articles. One ground is available only to a corporation with 35 or fewer shareholders: that liquidation is reasonably necessary to protect the complaining shareholders' rights or interests (section 1800(b)(5)). After a hearing, the court may order dissolution or make other orders "as justice and equity require" (section 1804).

Fiduciary duties after the exit

When a partner leaves, the right to manage ends and the duty of loyalty ends for future matters, but the duties of loyalty and care continue for matters that arose before the dissociation (section 16603). In a member-managed LLC, a dissociated member's fiduciary duties end only for matters arising after the dissociation (section 17706.03(a)(2)). Both rules matter when a departing owner wants to take customers or start a competing business.

Debts and liabilities

Leaving an LLC does not by itself discharge any debt, obligation or other liability the member owed the company or the other members while a member (section 17706.03(b)). A partnership that buys out a dissociated partner must indemnify that partner against partnership liabilities, except liabilities from the partner's own acts after dissociation described in section 16702 (section 16701(d)).

Death or incapacity

A partner who dies, or for whom a guardian or general conservator is appointed, is dissociated (section 16601(7)). When an LLC member dies or becomes incapacitated, the member's executor, conservator, attorney-in-fact or other legal representative may exercise the member's rights to settle the estate or administer the property (section 17706.03(c)).

A worked example

For example, imagine a hypothetical two-member LLC that runs a design studio in Glendale. Each member owns half. Their operating agreement says nothing about buyouts. After a year of disagreements over hiring, the members cannot agree on any major decision, and one of them tells the other she wants out and asks to be paid for her half.

Because the agreement is silent, the default rules apply. She can file an action for judicial dissolution, citing deadlock under section 17707.03(b)(4). Her partner, who wants to keep the studio, can respond by electing to buy her interest for cash at fair market value. If they cannot agree on the number, he can post a bond for her estimated reasonable expenses and ask the court to stay the dissolution and fix the value; the court then appoints three disinterested appraisers, and the valuation date is the day she filed unless the court picks another date for good cause. If he does not pay within the time the decree allows, the studio is wound up and dissolved instead.

As a simple illustration of the arithmetic only: if the appraisers fixed the fair market value of her membership interest at $150,000, that is the price he would have to pay in cash to keep the business, before any deduction the statute allows. Whether a court would accept deadlock as a ground, and what the appraisers would find, depends on evidence this example does not supply. A buy-sell clause signed at the start would likely have settled most of these questions in advance.

Common mistakes when a co-owner wants out

• Assuming there is no agreement. Emails, a signed investment memo or years of profit sharing may form or prove terms. Look before you assume the statute controls.
• Leaving without a written notice. The date of dissociation drives interest under section 16701(b) and, in a partnership, the 120-day payment clock. A dated letter avoids arguments later.
• Walking away from the company's paperwork. An LLC owes the annual tax until a certificate of cancellation or dissolution is filed with the Secretary of State (Revenue and Taxation Code section 17941(b)); our guide to what an LLC or corporation costs to keep in California lists those ongoing costs.
• Letting filings lapse during the fight. A company that stops filing returns or Statements of Information can be suspended, which creates new problems in court; see what happens if your California LLC or corporation is suspended.
• Forgetting the business name on file with the county. If the business uses a fictitious business name, the county statement lists each registered owner. Our page on filing a fictitious business name in Los Angeles County explains withdrawal and abandonment filings.
• Taking company money or clients on the way out. Duties of loyalty and care continue for matters that arose before the exit, so self-help can turn a buyout negotiation into a lawsuit.

What to do this week

1. Gather every agreement, amendment and signed consent, plus the company's tax returns and recent financial statements.
2. Look up the company's status and filings on the Secretary of State's business search, and note whether it is active.
3. Write down the date the co-owner first said he or she wanted out, and keep that message.
4. Find any buy-sell, valuation, notice or non-solicitation clause and mark the deadlines it sets.
5. Secure the company's bank accounts, passwords and records so both sides can see them and neither side can empty them.
6. Check the time limits for any claim you may have; our table of deadlines to sue for breach of contract in California is a starting point.
7. Talk with a business attorney before you sign a buyout or respond to a demand letter.

Frequently asked questions

Can my partner just quit and stop working in the business?

In a general partnership, yes: a partner has the power to dissociate at any time, but leaving in breach of the agreement or before a fixed term ends is wrongful and exposes the partner to damages under section 16602(c). The partnership then generally must buy the departing partner's interest.

Can I force a co-owner out?

Sometimes. A partner may be expelled under the partnership agreement, by unanimous vote of the other partners in limited situations, or by a court for wrongful conduct that materially harms the business (section 16601(3) to (5)). In an LLC or corporation, removal usually depends on the operating agreement, bylaws or shareholder agreement.

How is my interest valued if we never agreed on a formula?

The statutes set the standard: for a partnership, the greater of liquidation value or going-concern value without the departing partner (section 16701(b)); for an LLC, fair market value; for a corporation, fair value based on liquidation value, taking into account a possible sale of the whole business. If the sides cannot agree in an LLC or corporate case, three court-appointed appraisers set it.

Does leaving the LLC end my responsibility for what happened while I was a member?

No. Section 17706.03(b) says dissociation does not by itself discharge debts, obligations or liabilities to the company or other members that arose while you were a member.

What if my co-owner has already sued us?

Respond on time. A dissolution or buyout case starts with a complaint like other civil cases, and our page on how long you have to respond to a lawsuit in California explains it. In an LLC or corporate case, the other owners' right to elect a buyout is a key early decision.

Who pays the lawyers in a buyout dispute?

The buyout statutes address one situation: if the owners who elected to buy do not pay within the time the decree sets, judgment is entered against them and their bond for the moving owners' expenses, including attorney fees (sections 17707.03(c)(3) and 2000(c)). Otherwise, recovery usually turns on whether your agreement has a fee clause, which our page on recovering attorney fees under a contract explains.

How can Glendale Law help?

We help owners plan exits before they happen and work through them when they do, whether that means drafting a buy-sell clause, negotiating a buyout or handling a dissolution case. If the dispute heads to court, our civil litigation practice handles the case. Call (818) 244-9000 or request a consultation.