I created a company with friends. It has sales of $1 million. Two partners have taken control of the bank accounts and want to hunt others. What can we do?
By Quentin Fottrell
“I suggested that we pay them salaries like any other employee, in addition to their profit sharing. They don’t seem to like this idea’
I went into business with friends who held a night market. We organize big events every two weeks. We started an LLC as equal members, all with a 25% share.
Friend A came up with the idea to do it and said he wanted us to be his partners, and he wouldn’t do it without us. We all put in an equal amount of $2,000 for start-up capital. Friend A was unemployed at the time and was available to work on the event 100% of the time.
Friend B had a part-time job, but soon decided to quit and work full-time for the LLC.
Friend C had a full-time job and could only provide limited support.
Friend D was 6 months pregnant when we started and was available to help get the event started, but was soon to have a baby and eventually return to work as an independent contractor.
No operating agreement has been put in place.
At our third event, it was very clear that the event was very popular and that we were bringing in a lot of money.
We paid each other $1,000 per event.
It was also around this time that Friend A and Friend B started pushing “buyouts” on Friends C and D, and started taking the position that we were somehow bad friends to expect 25% from a company we weren’t going to work at.
I suggested that we pay salaries like any other employee, in addition to their profit sharing. They didn’t seem to like the idea. Friends A and B essentially hijacked control of the business, blocked access to bank accounts, business documents, accounting and funds to anyone but themselves.
The event grossed over $1 million in revenue and Friends C and D didn’t see a dime. Friends A and B seem to only want to talk about their initial buyout offers of $5,000 for Friend C and $8,000 for Friend D with no property.
I did not go into this business as a short-term investment. So far, they have not responded to calls to put an operating agreement in place. I would like to implement one to protect my distributive share.
Am I unreasonable to expect ongoing guaranteed payments of $1,000 for each owner for every event we’ve hosted, set up salaries for owners who work for the LLC, and retain ownership?
Trying to be fair in New Jersey
It’s time to stop trying to be fair and start getting real. Before you do anything with friends – whether it’s doing business together as partners, investing in their business, or even buying property together – you should do it with a competent lawyer. and ensure that every contingency and aspect of the business – – governance, expectations, responsibilities, salaries, exit plans, etc. – are documented in a rock-solid business plan. This prevents people from claiming the business as their own, taking over bank accounts, or excluding other partners.
You are no longer “friends” per se. You are business partners and there is a large sum of money involved, so all presumptions of good conduct are ruled out. You have all invested an equal amount and as such you are all equal partners. If two of these friends aren’t doing their part because they have other responsibilities, you should deal with it, but Friends A and B can’t force them to take buyouts. That’s not how business works in real life. You and your other two friends need to hire a lawyer to sort this out.
Peter Mahler, partner and business divorce specialist at Farrell Fritz, agrees. “If, as the saying goes, misery loves company, our friend from New Jersey should feel good. I’ve seen so many stories like this involving friends who have a great idea for a new business, create an LLC through which to operate the business which then takes off, and then find themselves at odds over who does or does not contribute to the business; how the profits of the business should be divided and, in the most extreme cases, who is or is not a member of the SARL.”
Laws governing LLCs can vary widely from state to state, Mahler says. “Where members do not have a written operating agreement, the LLC will be governed by the so-called ‘default’ rules of the LLC statute of the state in which the LLC is formed.” So consult a lawyer and negotiate a fair agreement with the other members with or without the help of a lawyer, he adds. “Consider it the price you pay for not defining the responsibilities and expectations of the parties in an initial agreement.” Otherwise, you will need a mediator.
The ultimate — but not always avoidable — goal is to avoid costly litigation, which will emotionally and financially impact all four partners, and could eat up the lion’s share of the money your LLC has earned. You need to treat this like a business deal and put aside the baggage of being a “good friend” or a “bad friend”. The gloves are already off and your only goal is to find a way forward to split the profits equally, while agreeing on the salaries of the full-time workers. You can decide to dissolve the LLC, but as equal partners, payments will have to be made.
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