By Beth Florkowski of Fausone Bohn, LLP posted in Business on Wednesday, December 18, 2019.

Dan Artaev, Esq.

The four “D”s – divorce, death, disability, and debt – are realities of life that no one likes to think about. However, planning for the bad as well as the good is a part of running a business. With a proper plan in place, a company will suffer much less disruption and uncertainty when the unthinkable happens.

One recent case demonstrates how something like divorce can result in unexpected financial consequences for a small business. In Michigan, three partners in a small auto parts manufacturer were shocked to learn that the fourth partner’s impending divorce would result in his ex-wife owning part of their business. Small businesses are particularly vulnerable to members’ interests becoming part of a divorce property dispute. And unlike blue-chip stock, who owns the shares of a small business has a direct impact on the day-to-day operations and decision making. In this Michigan case, the owners admittedly failed to plan for a divorce and ended up having to borrow $250,000 to buy out the divorcing partner’s shares, which then resulted in a significant unplanned financial impact on their bottom line.

Proper planning and consultation with a business attorney can ensure you have a plan in place when a partner gets divorced, dies, becomes disabled, or files bankruptcy. One such plan can be restrictions on membership interest transfers right within the Operating Agreement. The business may be given a right of first refusal, or the recipient’s voting or management rights may automatically be revoked until express reinstatement. Another way to address this is through a separate buy-sell agreement between the company and its members.

Whatever the plan, it is critical to have one for your business. Contact business attorney Dan Artaev for a consultation about your company’s Operating Agreement and to preserve and protect the members’ interest. Dan can be reached at dartaev@fb-firm.com or 248-912-3232.