When a Business Partner Commits Misconduct: What New Jersey Law Allows You To Do and What It Does Not

When a Business Partner Commits Misconduct: What New Jersey Law Allows You To Do and What It Does Not

How to Handle Employee-Level Misconduct When the Wrongdoer Still Owns a Share of the Business

Disputes between business partners are challenging enough when they involve disagreements over finances, operations, or the business's direction. However, when one partner engages in outright misconduct, particularly conduct that would warrant termination in any other employee, the situation becomes far more complicated. This is particularly true in closely held companies where the partners are not only owners but also the business’s only employees.

Under New Jersey law, a business owner does not lose their ownership rights simply because they have been removed from day-to-day operations. Firing a partner from their employee role does not, in and of itself, remove them as an equity holder. This distinction creates significant legal and operational challenges, especially when the misconduct is serious enough to jeopardize the business’s integrity or legal standing.

A Practical Example: Forgery by a Partner-Employee

Consider a common scenario. Three individuals form a New Jersey business together. They are equal partners and also the company’s only employees. The business operates under a formal operating agreement; however, like many small businesses, roles and responsibilities have become blurred over time.

Two of the partners discover that the third has been forging client signatures on key documents to expedite the execution of contracts. The conduct is not only unethical but also potentially criminal. The two remaining partners want him out, wholly and immediately.

They terminate him from his employee role. Payroll is stopped. His access to company email, servers, and software is revoked. However, he remains a one-third owner. Therein lies the legal dilemma.

Why Terminating Employment Does Not Terminate Ownership

Under New Jersey law, terminating a partner from their employment capacity is legally distinct from terminating them as an owner. Ownership interests in a partnership, LLC, or closely held corporation are property rights. They are governed by the entity’s formation documents and the applicable statutes, not by at-will employment principles.

In this example, the misconduct may justify immediate termination from his role as an employee. But unless the operating agreement includes specific language allowing for forced buyout, expulsion, or termination of ownership interests for cause, the remaining partners cannot simply declare him “removed” as an owner. Doing so without legal authority may constitute a breach of fiduciary duty or even give rise to claims for conversion or oppression.

What New Jersey Law Permits—and What It Requires

If the entity is a limited liability company, the governing statute is the Revised Uniform Limited Liability Company Act (RULLCA), codified at N.J.S.A. 42:2C-1 et seq. Under RULLCA, a member can be dissociated (removed) in limited circumstances, including by judicial order if that member has engaged in wrongful conduct that materially and adversely affects the company.

Specifically, N.J.S.A. 42:2C-46(e) permits a court to order the expulsion of a member where they have engaged in conduct relating to the company’s activities that makes it not reasonably practicable to carry on the business with them. That language is purposefully narrow. Courts will not grant expulsion lightly. The remaining partners must provide admissible evidence of serious misconduct and demonstrate that continued co-ownership threatens the functioning or legality of the business.

If the entity is a general partnership, similar principles apply under the Uniform Partnership Act (1996). Under N.J.S.A. 42:1A-46, a partner may be expelled by judicial determination if they have engaged in wrongful conduct that materially affects the partnership or persistently breached the partnership agreement or duties owed to the partnership.

Steps You Should Take And Why You Must Follow Procedure

The appropriate course of action in a situation like this involves several strategic steps:

First, the misconduct must be fully documented. The partners should not rely on oral accusations or suspicions. Gather original documents, emails, timestamps, or testimony from witnesses who can confirm the misconduct. If the issue involves forgery, as in the example above, it may be necessary to retain a forensic document expert or involve law enforcement. A criminal investigation may provide leverage, but the business should not initiate criminal proceedings without legal counsel.

Second, the offending partner should be formally removed from their employee role. This action should be taken through a written notice and corporate resolution, in accordance with the operating agreement or bylaws. The company should revoke access to sensitive systems, secure physical and digital assets, and notify clients or vendors as necessary to mitigate further harm.

Third, the remaining partners should review the operating agreement. If it contains a buyout clause, expulsion provision, or formula for valuing an interest in the event of misconduct, those terms should be followed precisely. If the agreement is silent or does not permit forced removal, the next step is to petition the Superior Court for judicial expulsion under the applicable statute.

In parallel, the business may consider bringing civil claims against the wrongdoer for breach of fiduciary duty, fraud, conversion, or other actionable conduct. These claims can support a petition for expulsion and may form the basis for monetary damages or disgorgement of ill-gotten gains.

What You Should Not Do

Partners must refrain from taking unilateral or retaliatory actions that exceed their authority under the law or the governing documents. Do not lock out the partner from ownership rights. Do not announce to clients or vendors that the individual has been "removed" as an owner unless a court has ordered it. Do not strip them of their interest on paper or withhold rightful distributions unless authorized by agreement or court order. Doing so will almost certainly result in a counterclaim for oppression, breach of fiduciary duty, or wrongful removal.

It is also crucial not to negotiate a buyout or settlement without the guidance of legal counsel. Valuation of a partner’s interest, particularly where misconduct has occurred, is complex. Offers must be documented carefully and comply with the terms of the operating agreement and governing law.

Conclusion: Remove the Bad Actor Legally—Or Risk Creating a Bigger Problem

Dealing with a partner who has engaged in misconduct is not simply a matter of firing an employee; it requires a thorough investigation and a comprehensive response. Ownership interests cannot be erased with a memo or vote. In New Jersey, proper procedure must be followed. That includes formal removal from employment, review of the operating agreement, documentation of wrongdoing, and, if necessary, a judicial petition for expulsion.

Handled correctly, the remaining partners can protect the business, limit legal exposure, and move forward without the disruption of the wrongdoing partner. Handled incorrectly, the business may find itself facing a new lawsuit on top of the original problem.

For more information about how to handle partner misconduct or to schedule a consultation, please contact the Law Offices of Peter J. Lamont at www.pjlesq.com, call 201-904-2211, or email info@pjlesq.com.

Contact us today to discuss your business or legal matter. Put our 20+ years of legal experience to work for you.

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For detailed insights and legal assistance on topics discussed in this post, including litigation, contact the Law Offices of Peter J. Lamont at our Bergen County Office. We're here to answer your questions and provide legal advice. Contact us at (201) 904-2211 or email us at  info@pjlesq.com.

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About Peter J. Lamont, Esq.

Peter J. Lamont is a nationally recognized attorney with significant experience in business, contract, litigation, and real estate law. With over two decades of legal practice, he has represented a wide array of businesses, including large international corporations. Peter is known for his practical legal and business advice, prioritizing efficient and cost-effective solutions for his clients.

Peter has an Avvo 10.0 Rating and has been acknowledged as one of America's Most Honored Lawyers since 2011. 201 Magazine and Lawyers of Distinction have also recognized him for being one of the top business and litigation attorneys in New Jersey. His commitment to his clients and the legal community is further evidenced by his active role as a speaker, lecturer, and published author in various legal and business publications.

As the founder of the Law Offices of Peter J. Lamont, Peter brings his Wall Street experience and client-focused approach to New Jersey, offering personalized legal services that align with each client's unique needs and goals​.

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