Expelling a Business Partner: What New York and New Jersey Law Say
Business relationships break down. Partners stop communicating, stop contributing, or start actively harming the business. When that happens, the question that inevitably arises is: can we force this person out?
The answer depends on two things: what your governing documents say, and what state law permits. And those two things do not always align in the way business owners expect.
The Starting Point: Your Governing Documents
For LLCs, the operating agreement is the primary document. For corporations, the shareholder agreement (and in some cases the certificate of incorporation or bylaws) controls. These documents may — or may not — include provisions addressing what happens when the business relationship breaks down irrecoverably.
If your operating agreement or shareholder agreement contains an expulsion provision, it will typically specify the grounds for expulsion (material breach, conviction of a crime, disability, competing with the company, etc.), the procedure for expulsion (majority or supermajority vote, notice, opportunity to cure), and the valuation and buyout mechanism that applies when a member or shareholder is expelled.
If your governing documents are silent on expulsion — which is common, especially for businesses that used a generic template at formation — you are left with whatever state law provides, which is often less than business owners hope for.
What New York Law Says
Under the New York Limited Liability Company Law, the default rules do not provide a clean statutory mechanism to expel a member against their will. Without an operating agreement provision authorizing expulsion, the remaining members generally cannot vote to remove a co-member from the LLC. The practical options in a true breakdown are often limited to judicial dissolution under NYLLCL § 702 — which requires showing that it is not reasonably practicable to carry on the business in conformity with the operating agreement — or a negotiated buyout.
For corporations, New York Business Corporation Law § 1104-a allows holders of at least 20% of the shares to petition for judicial dissolution based on oppressive conduct by the majority — but this is a remedy for the minority, not a tool for majority expulsion of a minority shareholder.
What New Jersey Law Says
New Jersey’s Revised Uniform Limited Liability Company Act (N.J.S.A. 42:2C-46) takes a somewhat more permissive approach. It permits expulsion of a member by unanimous consent of the other members if the expelled member has engaged in wrongful conduct that adversely and materially affects the company, has willfully or persistently breached the operating agreement, or has engaged in conduct making it not reasonably practicable to carry on the company’s activities with that person as a member. The statute also permits court-ordered expulsion on similar grounds.
Even with these statutory tools, the process is rarely simple. A member who disputes their expulsion will challenge both the grounds and the valuation. Having a well-drafted operating agreement that addresses these questions in advance is dramatically preferable to litigating them under statutory default rules.
The Risk of Being on the Wrong Side
Here is the provision that many business owners do not think about when they negotiate their operating agreement: the same expulsion clause that lets you remove a bad partner can be used to remove you. A majority partner who controls the votes can use an expulsion provision to force out a minority partner — at a valuation the minority may dispute, through a process the minority may view as unfair, for reasons the minority may contest.
This is not hypothetical. Minority members and shareholders who agree to broad expulsion provisions without negotiating adequate procedural protections — notice periods, independent valuation, dispute resolution rights — sometimes find themselves on the receiving end of that provision rather than wielding it.
The practical lesson: if you are negotiating governance documents for a new business, think carefully about expulsion from both sides. What triggers it? Who decides? How is the buyout price calculated? What procedural protections apply before the trigger can be pulled? These are questions that deserve serious attention at the formation stage — not in the middle of a dispute.
At Russo Law LLC, we counsel business owners on governance document drafting and business partner disputes in New Jersey and New York, including expulsion, dissolution, and buyout proceedings. Contact us to discuss your situation.
Disclaimer
The legal and business issues discussed in this post vary depending on the specific facts and circumstances of each situation. This corporate lawyer blog post is for informational purposes only and does not constitute legal advice. It is not an offer for Russo Law LLC to represent any party, nor does it create an attorney-client relationship. No action or inaction should be taken based on the information provided without seeking professional legal counsel. This post is intended for businesses in New York and New Jersey. It may not reflect laws in other jurisdictions.
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