How to Get Out of a Bad Business Partnership

How do your company’s agreements control a partner breakup?

Your operating agreement, partnership agreement, shareholder agreement, or buy-sell agreement controls first, and Minnesota’s statutes apply where those documents are silent. If the agreement sets an exit process or a buyout price, that process and price are your starting point.

For an LLC, “To the extent the operating agreement does not otherwise provide for a matter described in subdivision 1, this chapter governs the matter” (Minn. Stat. § 322C.0110 subd. 2). The partnership statute says the same: “To the extent the partnership agreement does not otherwise provide, this chapter governs relations among the partners and between the partners and the partnership” (Minn. Stat. § 323A.0103(a)).

For a corporation, written agreements among shareholders, “including employment agreements and buy-sell agreements,” are “presumed to reflect the parties’ reasonable expectations concerning matters dealt with in the agreements” (Minn. Stat. § 302A.751 subd. 3a). A court can order a buyout only after a shareholder establishes one or more of the statutory grounds for relief. When it orders a sale of shares that an agreement already prices, the court “shall order the sale for the price and on the terms set forth in them, unless the court determines that the price or terms are unreasonable under all the circumstances of the case” (§ 302A.751 subd. 2). In Gunderson v. Alliance of Computer Professionals, Inc., 628 N.W.2d 173 (Minn. App. 2001), the court applied that rule to a closely held corporation. It upheld a $2,300 formula price for a shareholder whose own appraiser valued his stake at $1,133,000. The court pointed out that the agreement was an arm’s-length deal, the owners had a legitimate business reason for the pricing provision, and they all took the same risk; the shareholder had also helped draft the agreement and proposed its valuation provision. The court reversed on a separate claim about his firing, covered below. The court stated that “Minnesota courts are required to honor shareholder agreements setting the purchase price of shares, unless the court determines that the price is unreasonable under all the circumstances.”

In my practice, I often see owners put off a buy-sell agreement until tension has already set in, when it is harder and more expensive to negotiate. If you have no agreement, the statutory defaults below decide. A buy-sell agreement for a Minnesota LLC is how owners replace those defaults with terms they chose.

How does a negotiated buyout or sale end the relationship?

A negotiated sale of one owner’s whole interest, to the other owner or to the company, lets the two of you set the exit terms. In an LLC, the sale alone does not end your membership, so the deal should also address your withdrawal. A negotiated sale also avoids the court costs described below. Your existing agreement may limit who can buy and at what price.

In an LLC, a sale of your interest, to anyone, does not end your membership by itself. Under Minn. Stat. § 322C.0502 subd. 1, a transfer of your interest “does not by itself cause a member’s dissociation or a dissolution and winding up of the limited liability company’s activities.” The buyer gets the money rights, but the transfer “does not entitle the transferee to: (i) participate in the management or conduct of the company’s activities.” Meanwhile, the selling member “retains all duties and obligations of a member” (subd. 7). A transfer that breaks a restriction in the operating agreement “is ineffective as to a person having notice of the restriction at the time of transfer” (subd. 6). For a clean exit, the deal should also address your withdrawal. Under the default rules, withdrawing before the company ends is wrongful and makes you liable for the damages your departure causes, as the next section shows. I suggest that the signed agreement deal with those damages expressly.

How a buyout is valued, including whether a minority discount applies, is covered in how a co-owner buyout is priced. I suggest putting the price, the payment schedule, security for any unpaid installments, and your release from company debts in one signed agreement, because a buyout paid over time leaves you as a creditor of the business you left.

What happens when you walk away from a Minnesota LLC?

You can withdraw from a Minnesota LLC at any time, but under the statute’s default rules, withdrawing before the company ends is wrongful. You owe the damages your departure causes, you lose your management rights, and the company owes you no payment for your interest.

The statute gives you the power to leave: “A person has the power to dissociate as a member at any time, rightfully or wrongfully, by withdrawing as a member by express will” (Minn. Stat. § 322C.0601 subd. 1). A departure is wrongful only if it breaches an express term of the operating agreement or “occurs before the termination of the company and: (i) the person withdraws as a member by express will” (subd. 2). A member who wrongfully dissociates “is liable to the limited liability company and, subject to section 322C.0901, to the other members for damages caused by the dissociation” (subd. 3).

After you leave, three things change under Minn. Stat. § 322C.0603 subd. 1:

1. Management. “the person’s right to participate as a member in the management and conduct of the company’s activities terminates.”
2. Ownership. Your interest “is owned by the person solely as a transferee,” so you keep the money rights without a vote.
3. Payment. “A person’s dissociation does not entitle the person to a distribution” (Minn. Stat. § 322C.0404 subd. 2).

You are dissociated when “the company has notice of the person’s express will to withdraw as a member,” or on a later date you specify (Minn. Stat. § 322C.0602). I suggest negotiating your exit terms before you give that notice, because the notice fixes the date these consequences begin. The page on resigning from a Minnesota LLC covers the mechanics of the notice and what happens to your capital.

What happens when you walk away from a general partnership?

A partner can always withdraw from a Minnesota general partnership. In a partnership at will, the partnership’s notice of your withdrawal dissolves it unless all partners agree to continue. In other partnerships, the business usually continues and the partnership must buy your interest at the statutory price, less what you owe, unless at least half of the remaining partners choose to dissolve it after a wrongful departure.

The power to leave is fixed: “A partner has the power to dissociate at any time, rightfully or wrongfully, by express will pursuant to section 323A.0601(1)” (Minn. Stat. § 323A.0602(a)). “A partner’s dissociation is wrongful only if” it breaches an express term of the partnership agreement or, in a partnership “for a definite term or particular undertaking,” comes early in one of the ways subsection (b)(2) lists. A wrongful departure makes the partner “liable to the partnership and to the other partners for damages caused by the dissociation” (subsection (c)).

A “partnership at will” is one “in which the partners have not agreed to remain partners until the expiration of a definite term or the completion of a particular undertaking” (Minn. Stat. § 323A.0101(10)). In that kind of partnership, the partnership’s notice of a partner’s “express will to withdraw as a partner” dissolves it (Minn. Stat. § 323A.0801(1)). After dissolution, the partnership “continues after dissolution only for the purpose of winding up its business,” unless “all of the partners, including any dissociating partner other than a wrongfully dissociating partner, may waive the right to have the partnership’s business wound up and the partnership terminated” (Minn. Stat. § 323A.0802). A partnership for a definite term or particular undertaking also dissolves on “the express will of at least half of the remaining partners to dissolve the partnership business,” if expressed within a set period after a partner’s wrongful departure or certain other departures (Minn. Stat. § 323A.0801(2)).

When a departure does not dissolve the partnership, Minn. Stat. § 323A.0603(a) sends the partners to the buyout sections. The partnership “shall cause the dissociated partner’s interest in the partnership to be purchased for a buyout price” (Minn. Stat. § 323A.0701(a)). The price is based on “the greater of the liquidation value or the value based on a sale of the entire business as a going concern without the dissociated partner” (subsection (b)). Damages for a wrongful departure and other amounts the partner owes “must be offset against the buyout price” (subsection (c)). The partnership must also indemnify the departing partner against partnership liabilities, “except liabilities incurred by an act of the dissociated partner under section 323A.0702” (subsection (d)). If no price is agreed within the statutory period after the departing partner’s written demand, the partnership must pay its own estimate of the price in cash (subsection (e)). One limit applies to an early exit from a term partnership: “A partner who wrongfully dissociates before the expiration of a definite term or the completion of a particular undertaking is not entitled to payment of any portion of the buyout price until the expiration of the term or completion of the undertaking, unless the partner establishes to the satisfaction of the court that earlier payment will not cause undue hardship to the business of the partnership” (subsection (h)). A departing partner who disputes the price “may maintain an action against the partnership” to set it, but only within the time subsection (i) allows. That time runs from the partnership’s tender of “payment or an offer to pay,” or from the departing partner’s “written demand for payment if no payment or offer to pay is tendered,” so I suggest checking the current text of that subsection as soon as either event occurs. The page on a partner who walks away walks through the demand, payment, and court steps.

How can you remove a bad partner instead of leaving?

You can remove a co-owner through the expulsion terms in your agreement, by a unanimous vote in a few narrow situations the statute lists, or by a court order for serious misconduct or for conduct that makes it “not reasonably practicable” to carry on the business with that owner. A personality conflict or poor work alone is not one of the listed unanimous-vote situations.

For an LLC, Minn. Stat. § 322C.0602 lists the routes:

1. Under the agreement. A member is dissociated when “the person is expelled as a member pursuant to the operating agreement.”
2. By unanimous consent. The other members may expel a member “by the unanimous consent of the other members if” one of four listed situations exists, such as a transfer of all of that member’s transferable interest or a business that is unlawful to carry on with that member.
3. By court order. On the company’s application, a court may expel a member who “has engaged, or is engaging, in wrongful conduct that has adversely and materially affected, or will adversely and materially affect, the company’s activities”; who “has willfully or persistently committed, or is willfully and persistently committing, a material breach of the operating agreement or the person’s duties or obligations under section 322C.0409”; or who “has engaged, or is engaging, in conduct relating to the company’s activities which makes it not reasonably practicable to carry on the activities with the person as a member.”

Expulsion removes the member’s vote, not the money interest. An expelled member’s “transferable interest owned by the person immediately before dissociation in the person’s capacity as a member is owned by the person solely as a transferee” (Minn. Stat. § 322C.0603 subd. 1). The limits on expelling an LLC member without cause are covered separately.

For a general partnership, a court may expel a partner “on application by the partnership or another partner,” including where “the partner engaged in conduct relating to the partnership business which makes it not reasonably practicable to carry on the business in partnership with the partner” (Minn. Stat. § 323A.0601(5)). If the partnership continues, it then buys the expelled partner’s interest under § 323A.0701. In a corporation, the routes this page covers for making a co-owner sell are a buy-sell agreement that requires the sale and a court-ordered buyout under § 302A.751. If your co-owner has stopped participating rather than misbehaving, see a partner who stops responding.

What rules apply when you fire a co-owner who works in the business?

Minnesota presumes that employment for an indefinite term is at will, absent “an express or implied agreement to the contrary or sufficient consideration in addition to the services to be rendered.” Even so, in a closely held corporation, firing a shareholder-employee can be unfairly prejudicial conduct that supports a court order, including a buyout. A signed agreement that permits termination for any reason and requires a sale of shares can defeat that claim. The video at the top of this page says the law generally does not let owners fire a co-owner in a small business. In a closely held corporation, Minnesota presumes the job itself is at will, and the fired owner’s protection is a possible claim for court relief, such as a buyout.

Under Minn. Stat. § 302A.751 subd. 1, a shareholder can seek relief when “the directors or those in control of the corporation have acted in a manner unfairly prejudicial toward one or more shareholders in their capacities as shareholders or directors of a corporation that is not a publicly held corporation, or as officers or employees of a closely held corporation.” In deciding what relief to give, the court must consider “the reasonable expectations of all shareholders as they exist at the inception and develop during the course of the shareholders’ relationship with the corporation and with each other” (subd. 3a).

In Gunderson, the Minnesota Court of Appeals addressed an early shareholder, officer, and employee of a closely held corporation who was fired and removed as a shareholder under a buy-sell agreement. The court held his job was at will, explaining that “In the absence of an express or implied agreement to the contrary or sufficient consideration in addition to the services to be rendered, Minnesota law presumes that employment for an indefinite term is at will.” It still reversed the dismissal of his shareholder-employee claim and the premature denial of his buyout motion as to that claim, and sent the case back to the district court. The court explained that “Typical close-corporation shareholders commonly have an expectation of continuing employment with the corporation” and that “The discharge of a shareholder-employee may thus be grounds for equitable relief.” It also noted that “shareholders who sign buyout agreements permitting termination of employment for any reason and obligating shareholders to sell their shares to the corporation upon termination of employment would not likely have a reasonable expectation of continuing employment.”

Gunderson applied the corporation statute. The LLC statute’s comparable ground is worded differently: conduct by those in control that is “oppressive and was, is, or will be directly harmful to the applicant” (Minn. Stat. § 322C.0701 subd. 1). I suggest that an owner planning to fire a co-owner first read every agreement that mentions employment or a buyout, because those documents shape whether the fired owner’s expectation of a job was reasonable. The rules for shareholder-employees and unfairly prejudicial conduct are covered in more depth separately.

When can a Minnesota court dissolve the business or order a buyout?

A Minnesota court can dissolve a business, or order a lesser remedy such as a buyout, only on the grounds listed in the statute for your type of business. Those grounds include deadlock, illegal or fraudulent conduct, unfairly prejudicial or oppressive conduct, and a business that can no longer practicably continue.

1. Corporations. Minn. Stat. § 302A.751 subd. 1 lets a shareholder sue when directors “are deadlocked in the management of the corporate affairs and the shareholders are unable to break the deadlock,” when those in control “have acted fraudulently or illegally toward one or more shareholders,” when they have acted in an unfairly prejudicial manner, or when “the corporate assets are being misapplied or wasted,” among other grounds. Once one or more of those grounds is established, a court-ordered buyout is at “the fair value of the shares as of the date of the commencement of the action or as of another date found equitable by the court,” unless an agreement sets the price (subd. 2). Before dissolving, “the court shall consider whether lesser relief suggested by one or more parties, such as any form of equitable relief, a buy-out, or a partial liquidation, would be adequate to permanently relieve the circumstances” (subd. 3b).
2. LLCs. Minn. Stat. § 322C.0701 subd. 1 lets a member seek dissolution when “it is not reasonably practicable to carry on the company’s activities in conformity with the articles of organization and the operating agreement,” or when those in control “have acted, are acting, or will act in a manner that is illegal or fraudulent” or in a manner “that is oppressive and was, is, or will be directly harmful to the applicant.” The buyout alternative is tied to the second group: “In a proceeding brought under subdivision 1, clause (5), the court may order a remedy other than dissolution, which may include the sale for fair value of all membership interests a member owns in a limited liability company to the limited liability company or one or more of the other members” (subd. 2). An operating agreement may not “vary the power of a court to decree dissolution in the circumstances specified in section 322C.0701, subdivision 1, clauses (4) and (5)” (Minn. Stat. § 322C.0110 subd. 3).
3. General partnerships. Minn. Stat. § 323A.0801(5) lets a partner ask a court to wind up the business when “the economic purpose of the partnership is likely to be unreasonably frustrated,” when “another partner has engaged in conduct relating to the partnership business which makes it not reasonably practicable to carry on the business in partnership with that partner,” or when “it is not otherwise reasonably practicable to carry on the partnership business in conformity with the partnership agreement.” A partnership agreement may not “vary the requirement to wind up the partnership business in cases specified in section 323A.0801(4), (5), or (6)” (Minn. Stat. § 323A.0103(b)(8)).

Two procedural details shape a corporate case from the start. “Proceedings under this section shall be brought in a court within the county in which the registered office of the corporation is located” (§ 302A.751 subd. 5), and an LLC oppression case follows the same county rule (§ 322C.0701 subd. 3). The corporate statute also lets the court “award reasonable expenses, including attorneys’ fees and disbursements,” against a party that “has acted arbitrarily, vexatiously, or otherwise not in good faith” (§ 302A.751 subd. 4). The court-ordered buyout under section 302A.751 page explains how that remedy runs once ordered.

How do you protect yourself on the way out?

Leaving does not erase what you already owe or what you personally signed. The protective steps are to get released from debts and guarantees, preserve your access to records, and avoid taking company business with you before you are out.

1. Debts you owe the company. An LLC member’s departure “does not of itself discharge the person from any debt, obligation, or other liability to the company or the other members that the person incurred while a member” (Minn. Stat. § 322C.0603 subd. 2).
2. Debts to lenders. An LLC’s debts “do not become the debts, obligations, or other liabilities of a member, manager, or governor solely by reason of the member acting as a member, manager acting as a manager, or governor acting as a governor” (Minn. Stat. § 322C.0304 subd. 1). That shield covers only liability “solely by reason of the member acting as a member,” and “the case law that states the conditions and circumstances under which the corporate veil of a corporation may be pierced under Minnesota law also applies to limited liability companies,” except as it relates to a company’s failure to observe formalities relating exclusively to the management of its internal affairs (subd. 3). In Gunderson the court observed that “Shareholders commonly guarantee corporate loans.” For a partnership, “A partner’s dissociation does not of itself discharge the partner’s liability for a partnership obligation incurred before dissociation,” and a release comes “By agreement with the partnership creditor and the partners continuing the business” (Minn. Stat. § 323A.0703(a), (c)). I suggest asking the lender for a written release before you sign the exit, because your guarantee is your own contract with that lender.
3. Public notice for a partnership. “A dissociated partner or the partnership may file a statement of dissociation stating the name of the partnership and that the partner is dissociated from the partnership” (Minn. Stat. § 323A.0704(a)). The statute treats the filed statement as “a limitation on the authority of a dissociated partner” (subsection (b)). I suggest filing it, because it creates a filed record of your departure.
4. Records. A departed LLC member, on a demand made in a record, “may have access to information to which the person was entitled while a member if the information pertains to the period during which the person was a member, the person seeks the information in good faith, and the person satisfies the requirements imposed on a member by subdivision 2, clause (2)” (Minn. Stat. § 322C.0410 subd. 3). A partnership “shall provide former partners and their agents and attorneys access to books and records pertaining to the period during which they were partners” (Minn. Stat. § 323A.0403(b)). The page on an owner’s right to company information covers how to make the request.
5. Conduct before you leave. In a member-managed LLC, a member’s duty of loyalty includes the duty “to refrain from competing with the company in the conduct of the company’s activities before the dissolution of the company” and to account for any benefit “from the appropriation of a limited liability company opportunity” (Minn. Stat. § 322C.0409 subd. 2). In a manager-managed LLC, “A member does not have any fiduciary duty to the company or to any other member solely by reason of being a member” (subd. 7), but every member must act “consistently with the contractual obligation of good faith and fair dealing” (subd. 4). A departing partner’s loyalty and care duties “continue only with regard to matters arising and events occurring before the partner’s dissociation, unless the partner participates in winding up the partnership’s business pursuant to section 323A.0803” (Minn. Stat. § 323A.0603(b)). Shareholders of a closely held corporation owe one another a duty “to act in an honest, fair, and reasonable manner in the operation of the corporation” (§ 302A.751 subd. 3a). I suggest not moving customers, deals, or staff to a new venture until your exit is signed, because a claim over a company opportunity that arose before you left can follow you.

What should a written exit agreement cover?

A written exit agreement should set the price and payment terms, release you from company debts and guarantees, state any limit on competing that Minnesota law allows, and exchange releases of claims. When an owner also worked as an employee, those releases should meet the federal and Minnesota release rules.

1. Price and payment. The agreement should state the price, the payment schedule, interest, and the security for any unpaid amount.
2. Debts and guarantees. The agreement should name each loan and guarantee and say who will pay it, with the lender’s release attached where you can get one.
3. Limits on competing. Under Minn. Stat. § 181.988 subd. 2, “Any covenant not to compete contained in a contract or agreement is void and unenforceable,” with two exceptions. Subdivision 1 limits the ban to “an agreement between an employee and employer that restricts the employee, after termination of the employment,” and defines an employee as “any individual who performs services for an employer, including independent contractors.” One exception applies when “the covenant not to compete is agreed upon during the sale of a business”: “The person selling the business and the partners, members, or shareholders, and the buyer of the business may agree on a temporary and geographically restricted covenant not to compete that will prohibit the seller of the business from carrying on a similar business within a reasonable geographic area and for a reasonable length of time.” The other applies when “the covenant not to compete is agreed upon in anticipation of the dissolution of a business”: “The partners, members, or shareholders, upon or in anticipation of a dissolution of a partnership, limited liability company, or corporation may agree that all or any number of the parties will not carry on a similar business within a reasonable geographic area where the business has been transacted.” Nonsolicitation and nondisclosure agreements are not covenants not to compete under subdivision 1. The ban applies to contracts and agreements entered into on or after July 1, 2023 (Laws 2023, ch. 53, art. 6, § 1).
4. Releases from an owner who was an employee. A release of federal age-discrimination claims must be “knowing and voluntary” under 29 U.S.C. § 626(f)(1). That law protects “individuals who are at least 40 years of age” (29 U.S.C. § 631(a)) and reaches employers with “twenty or more employees for each working day in each of twenty or more calendar weeks in the current or preceding calendar year” (29 U.S.C. § 630(b)). Its minimum terms include that “the individual is advised in writing to consult with an attorney prior to executing the agreement,” that “the individual is given a period of at least 21 days within which to consider the agreement,” and that “for a period of at least 7 days following the execution of such agreement, the individual may revoke the agreement, and the agreement shall not become effective or enforceable until the revocation period has expired.” Under Minnesota law, a release of claims under the Minnesota Human Rights Act “may be rescinded within 15 calendar days of its execution, except that a waiver or release given in settlement of a claim filed with the department or with another administrative agency or judicial body is valid and final upon execution,” and “A waiving or releasing party shall be informed in writing of the right to rescind the waiver or release” (Minn. Stat. § 363A.31 subd. 2). I suggest checking the current text of both statutes before you sign. Under the federal law, the agreement does not become effective or enforceable until the revocation period has expired; under the Minnesota law, the release may be rescinded during its own period.

Choosing Your Way Out

The way out of a Minnesota business with a bad partner starts with your own agreements, then turns on your type of business. A negotiated sale with your withdrawal built in lets you and your co-owner set the terms yourselves. An LLC member who simply withdraws keeps a transferee’s share of any distributions the company makes, has no right to be paid for the interest on leaving, and may owe damages. A partner’s withdrawal dissolves an at-will partnership; in other partnerships it leads to a statutory buyout unless at least half of the remaining partners express their will to dissolve the business after a wrongful departure. Removing the other owner takes your agreement’s expulsion terms, a narrow unanimous vote, or a court order, and a court can dissolve the business or order a buyout only on the grounds its statute lists. More on disputes between co-owners is collected under Minnesota ownership disputes. If you would like me to look at your situation, email me at [email protected] with a brief description of your business and your co-owner dispute. I can tell you which of these exits your type of business allows and what each one would likely cost you.