How Alabama Businesses Split Up

The dissolution of a business entity is a complex legal procedure that involves much more than simply ceasing operations. Whether the separation is mutual or the result of an internal dispute, the specific steps for winding up affairs in Alabama are strictly governed by the company’s organizational structure. Under Title 10A of the Alabama Code, the rules for dissolving a Corporation, a Limited Liability Company (LLC), or a Partnership differ significantly, dictating everything from how assets are distributed to how remaining liabilities are handled.

As an Alabama attorney, I frequently advise business owners on how to navigate these splits. The rules for a Corporation, a Limited Liability Company (LLC), or a General Partnership differ significantly under Alabama law (Title 10A).

This article is a guide to how different business entities handle dissolution, dissociation, and the winding-up process.

1. Corporations (C-Corps and S-Corps)

For corporations, ending the business is a two-step process: dissolution (terminating the corporate existence) and liquidation (the financial winding up).

Voluntary Dissolution Most corporate splits are voluntary. If the corporation hasn’t issued shares or started business yet, a majority of the initial directors or incorporators can file for dissolution. For active businesses, the process usually begins with the Board of Directors proposing dissolution, followed by shareholder approval. Alternatively, if all shareholders agree in writing, the corporation can be dissolved without a board meeting.

Involuntary and Judicial Dissolution When shareholders are fighting, the courts may get involved. A circuit court in Alabama can dissolve a corporation if:

• Deadlock: Directors are deadlocked, causing irreparable injury to the corporation.
• Shareholder Deadlock: Shareholders have been unable to elect directors for two consecutive annual meetings.
• Misconduct: Those in control are acting illegally, oppressively, or fraudulently.
• Waste: Corporate assets are being misapplied or wasted.

2. Limited Liability Companies (LLCs)

LLCs are the most flexible entities, but that flexibility requires careful attention to the Alabama Limited Liability Company Law.

When does an LLC dissolve? An Alabama LLC generally dissolves upon:

• Written consent of all members.
• An event specified in the LLC operating agreement.
• The departure of the last remaining member (unless there is an agreement to appoint new members within 90 days).

Judicial Intervention If members cannot agree on a path forward, a court may order dissolution if it determines that it is “not reasonably practicable” to carry on the LLC’s activities in conformity with the LLC agreement.

The “Buyout” Trap It is critical to note a major change in Alabama law regarding LLCs. Since 1998, the statutory “default rule” mandating buyouts for withdrawing members was removed. This means if your Operating Agreement does not explicitly state how a member is bought out, you may have to rely on judicial remedies to exit the company with the value of your shares intact.

3. Partnerships (General and Limited)

Alabama Partnership Law (Title 10A, Chapter 8A) introduces a vital distinction between Dissociation and Dissolution.

• Dissociation: When a partner leaves (withdraws, dies, or goes bankrupt), they are “dissociated.” This does not necessarily kill the business.
• Dissolution: This is the point where the partners stop normal business operations and begin winding up.

The Default Buyout Rule Unlike LLCs, Alabama partnership law does provide a statutory safety net. If a partner dissociates without causing a full dissolution, the partnership is generally mandated to purchase that partner’s interest for a “fair value” buyout price.

Limiting Liability For General Partnerships, filing a Statement of Dissolution is a crucial step. Ninety days after this statement is filed, third parties are deemed to have notice of the dissolution. This cuts off the authority of unauthorized partners to bind the firm to new debts during the winding-up phase.

Special Considerations for Closely Held Corporations

While the general rules of corporate dissolution apply to all corporations, “closely held” corporations—those with a small number of shareholders and no public market for their shares—face unique challenges. In Alabama, the law recognizes that these entities often operate more like partnerships than large public companies. Consequently, there are specific statutory provisions and judicial remedies designed to protect minority shareholders and resolve deadlocks.

1. The Two Types of Closely Held Corporations Alabama law distinguishes between closely held corporations based on when they were formed.

• Statutory Close Corporations (Pre-1995): Corporations formed before January 1, 1995, could elect “Statutory Close Corporation” status. If this status hasn’t been terminated, these entities operate under older special rules (Ala. Code §§ 10A-30-2.01 et seq.) which can include powerful options, such as a shareholder’s unilateral right to dissolve the company at will—similar to a partner withdrawing from a partnership—provided this right is stated in the articles and on share certificates.
• Modern Closely Held Corporations (Post-1994): For corporations formed after 1994, the “Statutory Close Corporation” election no longer exists. Instead, these corporations achieve flexibility through the Alabama Business Corporation Law. They rely heavily on Shareholders’ Agreements to create partnership-like governance.

2. The Power of the Shareholders’ Agreement For modern closely held corporations, the Shareholders’ Agreement is the most critical document for handling a split. Under Ala. Code § 10A-2A-7.32, these agreements can override standard corporate rules to tailor how a breakup happens. A well-drafted agreement can:

• Mandate Dissolution: Require the corporation to dissolve upon a specific event or the request of a specific shareholder.
• Resolve Deadlock: Establish a tie-breaking mechanism (such as a third-party arbitrator) to resolve director or shareholder deadlock without going to court.
• Shift Management: Transfer authority from the Board of Directors to the shareholders, effectively allowing the business to run exactly like a partnership.

3. Judicial Dissolution and “Oppression” When there is no agreement and the parties are fighting, a shareholder can petition the Circuit Court for dissolution. In the context of a closely held corporation, the grounds for this often include:

• Deadlock: Directors are divided, and shareholders cannot break the tie, causing injury to the business.
• Oppression or Fraud: The majority shareholders are acting in a manner that is illegal, fraudulent, or “oppressive” to the minority.
• Shareholder Deadlock: Shareholders have failed to elect directors for two consecutive annual meetings.

4. The “Buyout” Option: An Alternative to Dissolution Filing a lawsuit to dissolve a company is often used as leverage. However, Alabama law provides a specific “escape hatch” for the corporation and non-petitioning shareholders to stop the dissolution.

• Election to Purchase: Within 90 days of a shareholder filing a petition for judicial dissolution, the corporation (or other shareholders) may elect to purchase the petitioner’s shares at their “fair value.”
• Irrevocable: Once this election is made, it cannot be taken back.
• Fair Value Standard: If the parties cannot agree on a price, the court will determine the “fair value.” Crucially, Alabama courts generally reject the use of “marketability discounts” (discounts applied because the shares are hard to sell). This prevents majority shareholders from “squeezing out” a minority partner at an unfairly low price.

5. Fiduciary Duties in the Close Corporation Because shareholders in a closely held corporation cannot easily sell their shares on a public market, Alabama courts hold majority shareholders to a higher fiduciary standard, similar to the duties partners owe one another. Actions that harm the minority’s reasonable expectations—such as paying excessive salaries to family members while refusing to pay dividends—can be deemed a breach of this duty, leading to court-ordered remedies.

The Critical Role of Governing Documents

The controlling document for a business split is your governing document—Bylaws for corporations, Operating Agreements for LLCs, and Partnership Agreements for partners.

When these documents are drafted correctly, they dictate exactly how a split occurs, including:

• Buy-Sell Agreements: Defining the terms and price for buying out an owner.
• Dispute Resolution: How to handle deadlock without going to court.

What happens if we don’t have documents? If you lack a written agreement, statutory default rules apply.

• Partnerships: Partners have equal management rights and share profits/losses equally, regardless of capital contribution.
• LLCs: The implied contractual covenant of “good faith and fair dealing” applies and cannot be eliminated.
• Corporations: You are bound by rigid statutory procedures for meetings and voting.

The Final Step: Winding Up

Regardless of the entity type, you cannot simply lock the doors and walk away. “Winding up” is a mandatory legal phase where the entity must:

1. Collect assets.
2. Discharge or make provision for liabilities.
3. Distribute remaining assets to owners.

Alabama statutes provide strict procedures for handling claims. For example, entities can bar unknown claims by publishing a notice of dissolution in a newspaper. If a claimant does not commence a proceeding within two years of that publication, the claim is generally barred. Failing to follow these notice procedures can leave you personally exposed to “ghost” liabilities years down the road.

Conclusion

Splitting up a business in Alabama requires more than just shaking hands and parting ways. It requires strict adherence to statutory notice periods, a clear understanding of your fiduciary duties during the winding-up phase, and a strategy for valuing ownership interests.

Whether you are drafting a partnership agreement to prevent future headaches or are currently in the middle of a business dispute, professional legal counsel is essential to protect your assets. Call or schedule a consultation today to discuss with Will. You can also refer to my Business page for more information.

Disclaimer: This article provides a general overview of Alabama property law and does not constitute legal advice or create an attorney-client relationship. You should consult an attorney regarding your specific legal situation.