So, you’ve decided (or are considering) to leave the company you’ve either helped to form, purchased an interest in, or otherwise joined for one reason or another. There are many reasons why you may want or need to leave the company:
The first three green bullets above are most often associated with “uncontested departures,” while the remaining red bullets to are most often associated with “contested departures.”
Aside from the emotional issues of departing your partnership, there are legal and financial considerations that if left to their own devices, could spell financial ruin for you personally years later, whether contested or uncontested.
You will ALWAYS be better served in an uncontested departure, so if you can bite-the-bullet and do everything in your power to maintain a good relationship with your soon-to-be-former-partner or partners, you will save big.
As in divorce, an uncontested departure is significantly easier and more cost-effective than a contested departure.
Leaving a partnership takes planning and foresight. In an uncontested departure, you and your Partner(s) will collaborate and negotiate the terms for your departure, ultimately signing a “Separation Agreement” without the undue legal expense or court costs. Your Partner(s) may be unhappy about certain issues, or in you leaving, but in the end, will “do the right thing” either because they have to or because they want to.
In a contested departure, you and your Partner(s) will not communicate except through attorneys, and you will fight about the terms of departure, outstanding assets, and liabilities, and whether the Operating Agreement or Bylaws permit the type of departure you’re trying to accomplish. It may be very difficult or impossible to reach a “Separation Agreement,” and if you cannot, you may need to go to court or take the risk of departing without one. If you withdraw without a “Separation Agreement,” you run the risk of being sued, ruining your credit or worse, sometimes years after you’ve departed and thought you were in the clear.
Do you think it’s possible your partner is a Narcissist? If so, I think it’s safe to assume you will experience a contested departure.
In an uncontested departure, use the following checklist to perform a proper departure that will help minimize your risks and future liability:
Sending a letter or notice of your departure will not relieve you of financial obligations to lenders and other third-parties.
It’s not easy to remove yourself from obligatory documents.
Whether you’re listed as “a borrower” on a line-of-credit, a tenant on a commercial lease, or you’ve signed as a personal guarantee for the Company’s merchant account, these structures will seldom, if ever, allow you to leave without cancelling the account or contract outright, and requiring the Company to renegotiate a new relationship, account or contract. Simply sending a letter or notice to these Companies will NOT relieve you of your obligations, however. You must have a new contract or other document that firmly, unequivocally, releases you from any and all obligations associated with the obligatory document.
There may be strong opposition to this by your Partner(s), and oftentimes may cost the Company considerably more money in doing so.
For those obligatory documents, you cannot remove your name from, you will have to evaluate the risk associated with each one, and consider other options to the Company. Options include making the company put up some form of escrow account from which the obligation will be paid off, giving yourself some form of security interest in one or more of the Company’s assets, forcing your Partner(s) to personally indemnify you, etc. Clearly, if you’re confronted with this situation, you really do need to hire a competent business lawyer or business attorney to help you.
Outstanding obligatory documents you cannot be removed from represent one form of liability. Other liabilities to include in a Separation Agreement with your Partner(s) include but are not limited to potential lawsuits from third-party causes of actions (i.e. former disgruntled employees, past contract breaches, past violation of statutes or governmental regulations, and harms to customers or members of the public), outstanding tax liabilities (i.e. Unpaid NM Gross Receipts Tax), and accounts payable.
Law 4 Small Business can help you with your Separation Agreement. Learn more.
The point of a Separation Agreement is to write down everything you’ve agreed to with respect to your departure. While this may not sound all that important when you’re getting along with your Partner(s), remember that things can really change during your absence. If the Company doesn’t live up to its promises, you need some form of proof and leverage to enforce compliance. If a third-party creditor or judgment (think lawsuit) comes knocking on the door, a Separation Agreement will help validate whether you’re subject to potential liability or not. Same thing if the tax man comes knocking.
Terms to negotiate with your Partner(s), that should find their way into the Separation Agreement include:
Furthermore, your Separation Agreement should have the following legal clauses, at a minimum:
If you’re unfortunate enough to find yourself in the “Contested Departure” category, the formation documents will be controlling. If you have a LLC, that will be your Articles of Organization and your Operating Agreement. If you have a C-Corp or S-Corp, that will be your Articles of Formation and your Bylaws. There may be other documents, on top of those, including but not limited to a Partnership Agreement, Restriction Agreement or Investor Rights Agreement.
If no such documents exist, then you need to look to the statute in the state where your company is formed. The statute indicates rights, duties, obligations and procedures for owners and the company itself.
You must follow these documents (and the statute), and if they are (1) not being followed, or (2) create some form of inequitable relationship, your only recourse may be litigation. Otherwise, you vary from these formation documents at your peril, and your best option would be to get your Partner(s) to sign off on your departure. This means you may need to negotiate accordingly, and that may mean negotiating with a very weak position.
Before you do, you would be best served by consulting with a strong business attorney or corporate lawyer before you go too far down this path.
Consider talking to our experienced business attorneys to learn more about your options, if you think you’re in a “Contested Departure” situation.
Law 4 Small Business, P.C. (L4SB). A little law now can save a lot later. A Slingshot company.
Larry Donahue is a managing member of the firm, with 30-years of experience as an attorney with a focus on Internet law, intellectual property, corporate law, and contracts. Larry leads the firm's Internet sales efforts. He is licensed in the states of Illinois and New Mexico, as well as at the United States Patent and Trademark Office (USPTO).
Follow Larry Donahue on More articles by Larry DonahueThis excellent website really has all of the information I wanted about this subject and didn’t kniw who to
ask.
Hey larry
I have a Construction Business with my partner LLC one.
We are thunking to separate.he want to keep the company but actually the license is in my name.
What we have to do so i leave everything to him.
Does he have to have a new license for that?
Hi, John. The quick, knee-jerk answer I want to give you is, “your partner will need to obtain a new license for what you propose.” However, this really can be tricky, and this is the one of the few times I need to punt and not give you a specific answer. Instead, you really do need to hire a competent, local business attorney who can help you do this right. Here’s why: The rules around this vary from one state to the next. Depending on the state, you will have (1) specific requirements on whether you can actually leave a company while still permitting it to use your license in some way, and (2) what sort of liability you may have for their screw-ups, even though you’re not involved in the company any more. Good luck. Larry.
caroline wagner says:I am in partnership (llc) w/ someone who did not invest any monies and no money was owed them. It was simply a way of thanking them for helping me find the location and cheering me on. The contract reflects no money was invested on their part but they will retain 20% of the profits. However, I have discovered some unsavory things re: this person and feel it could cause problems down the line to be involved w/ them even as a 20% partner. May I simply remove their name from the partnership LLC paperwork and send in the changes to the State since no money was invested and the business has yet to make any profit. At this time, no profits have been made. We are still in the beginning stages. OR Do I need a new contract written up and signed by myself and the other party reflecting the change? Myself and the other party both reside in Texas.
Larry Donahue says:Hi, Caroline. Thank you for your question. I will assume for the sake of the question that you also have a TX LLC. Did you and your partner already sign the LLC paperwork (i.e. Operating Agreement)? If so, then you need to follow the formalities of that Operating Agreement, and that would include following whatever language pertains to “removing a member” if such language exists. If there is no language, then you will need to negotiate something with this other partner and get them to sign some form of “purchase agreement” or other document evidencing that you “bought them out” and that they are no longer a partner/owner/member in the company. If you and your partner have not yet signed the LLC paperwork (i.e. Operating Agreement), then you may be able to argue you’re still in negotiations although other evidence would be important, such as emails or any other evidence indicating what sort of deal you folks agreed to. It’s best to do something that she will agree to, and get that written down in the form of a purchase agreement or separation agreement, so that if and when the company starts doing better, you’re not defending yourself from a potential claim or cause of action regarding an ownership dispute. This will make your business very hard to sell or even borrow money on behalf of, if there is some sort of ownership dispute going on. I hope this helps answer your questions, if not, please feel free to contact us at any time! Thank you! Larry.
Peter Crag says:I am in a specialized small business where I build the product (let say guitars for now) and I need to get out. The partner is making foolish financial decisions and I don’t want to go down that road. If I leave, the product ceases to exist. Do I have an obligation to stay and make that product? If he has spent the deposits on the guitars, what can I do? Meeting with a lawyer this week, but curious about more answers,.
Larry Donahue says:Hi, Peter. Thank you for your question, and I’m sorry for the issues you’re dealing with. The immediate answer to your question is that indentured servitude and slave-labor is illegal in the United States, and therefore you can always leave. The bigger issue is what liability (if any) do you have to either the business or your partner, if you leave. The answer to that question is a bit complicated, and depends on a number of things. The first issue is the “formation documents,” if any exist, for the company. For example, if you are operating as a limited liability company, an “operating agreement” should exist and its terms should indicate how a member (or owner or partner) can leave the business, either by selling your ownership or disclaiming it. If there is no operating agreement, the answer to this will depend on what state your LLC is registered in. The second issue is whatever “formal agreement” exists between you and your partner, or you and the company. If there is an agreement in place, then you need to refer to that agreement on what the issues are, especially as they relate to your leaving the business. If there is no specific language to that, then an attorney is really going to have to look at the document to determine whether it’s really enforceable or not, as well as what language controls relating to liability if you should leave. The third issue relates to your partner: Is he simply “foolish,” or is he actively working against the company, potentially violating a “duty of loyalty” or “fiduciary duty” to the company? If the latter, then you may be able to do something to terminate the partnership, force him out, or force your own buyout, depending on the issues and despite the formation documents and/or formal agreement, as discussed above. Finally, a forth issue that comes to mind is termination. If you do leave, it’s much better to leave according to some sort of amicable settlement, even if reaching such an amicable settlement is hard. You want to have a formal document spelling out the terms of your departure, so that it’s crystal clear when you’ve left (so you don’t have further liability for any of the company’s debts, obligations or harms), and that it’s clear what assets and/or liabilities you’re taking with you upon your departure (if any). There may be other issues, but these four are the important once off the top of my head. It’s good you’re meeting with an attorney. I wish you the best of luck. Larry.
Ani says:I want to leave a partnership and it is a contested departure. Can you please email me a sample of a typical seperation agreement. I would really appreciate it. Thank you.
Larry Donahue says:Hi, Ani. I’m sorry, but we get paid to provide high-quality templates and legal services. We do have a template for sale for a reasonable price, if you’re interested. To purchase such a template, check out our Contract Templates purchase page. Note that we use these as a “starting point” for our clients, so I definitely want you to understand that our template documents are only a starting point and will probably not be suited for your needs without modification. Thank you for your request. Take care. Larry.
Kreytt says:Can I turn my sole proprietorship into a partnership and then leave the partnership to have the business run by them
Larry Donahue says:Hi, there. The short answer is “yes,” you can turn your sole proprietorship into a partnership, and then you can leave the partnership. The longer answer is you can do this, but you should be careful and you should make sure you have a “partnership agreement” that’s properly negotiated and executed to create the partnership, and then you should have a “separation agreement” that is (again) properly negotiated and executed to leave that partnership. Good luck to you! Larry.
Tiffany says:Hello,
My husband works for his family’s business with his mom and dad. He owns 26% of the company and has signed a few personal guarantees for the business (bank loans and equipment loans etc.) If he decides to withdraw from this LLC… do we just hope that the company keeps paying the monthly minimums due each month on the loans and equipment? Thank you for your time.
Hi, Tiffany. Thank you for your question. The first question to my mind is, “Can you husband simply withdraw from the LLC?” He may not be able to. He needs to look at the Operating Agreement to determine what rights he has, including whether he has the right to withdraw. Once you do that, you may find he has other rights, including the right to withdraw and be bought out. The Operating Agreement controls in this situation, and you need to follow it to the letter, unless the Members negotiate and agree otherwise. If there is no Operating Agreement, then you need to fall back to the statute in whatever state your LLC was formed. Most states will permit a member to voluntarily withdraw, although you need to be careful because if you don’t do it right, you can be on the hook for further liabilities of the LLC, even after you think you’ve withdrawn. The best way to handle this, is to get some sort of “separation agreement” with the remaining members. Then, you can at least get some sort of guarantee (i.e. promissory note) from the LLC and other members to help make sure those debts are paid. You can also demand other things, including making sure your debts are given the highest priority to be paid off, deadlines to refinance, etc. Good luck to you. Larry.
Charlize says:Hello,
I have two partners ( 3 partners in total including myself) and one of my partner wants to leave our company.
Each partners had 3:3:3 shares.
All three partners agreed that the leaving partner give up all his rights and obligations.
Now, the leaving partner wants to give his shares (33.33%) towards one partner.
If that happens, after that partner leave our company, the share portion would be 33.33% vs. 66.67%. I cannot agree with that share split.
Is it possible for leaving partner to transfer his shares even though he is giving up all his rights and obligations? Thank you so much for your time.
Most decently written operating agreements usually have a “right of first refusal” to the company provision. If yours doesn’t, you’ll need to check with statute to see if this is a permissible transfer between the members.
If there is nothing prohibiting the transfer, then it’s probably permissible and there’s probably not a lot you’re going to be able to do about it.
Jessica M Valdes says:I have so many questions I may need to actually speak to someone by phone. I am involved with an LLC, well it’s mine and another lady, she recently had me removed from the sunbiz paperwork, I came across this by accident. She did it when she amended our end of year months early. If she has removed me can I just walk away from the LLC and all aspects of the company? I have also not received a paycheck in more than 7 years, she just handed me cash at different times, but would write a check every week for $500 and deposit it into an account as if I signed it for payment with out my knowledge. I have so many concerns as far as IRS are concerned, will I owe them since she did the LLC taxes in my name as well, she has forged my signature on multiple items and now i’m finding out about all of this, i’m concerned for my well being. I need serious help. We created this LLC in 2006, but didn’t start of first coffee shop until 2008, I have been working this whole time this way not knowing what she was doing, she is refusing to provide me with the operating agreement and any other company documents, she is hiding money in safety deposit boxes and will not give me keys. She is expecting me to just keep working so she can keep taking money and not paying me. I am so confused and feel absolutely stupid in trusting someone else. How can I just leave?
Larry Donahue says:Hi, Jessica. Thank you for reaching out to us. Obviously, you have a number of issues your dealing with, which won’t be solved (or answered) in a blog post. I do have a few things to say about all of this, however. First, we encounter this somewhat frequently, and it’s always very sad, very emotional and very expensive to resolve. It sounds like your partner wants the best of both worlds: Free labor by making you believe you’re a part owner, but then your partner doesn’t want you to have any ownership and/or is making it difficult for you to assert your ownership. Can’t have it both ways. If you’re NOT an owner, then you’re entitled to back wages, withholding taxes and more. If you ARE an owner, then you may not be entitled to back wages, but you ARE entitled access to the books, formation documents, proper tax reports and more. Second, when I hear the phrase “forging my signature,” then that’s an immediate red-flag that things are very wrong. I strongly encourage you to hire LOCAL COUNSEL experienced in these matters, and start figuring out what’s going on. If you’re LUCKY, and most are not, you can avoid a lawsuit after you’ve spent some time and effort putting together an accurate financial picture of the books and your liabilities. If you’re NOT LUCKY, then you will need to file a lawsuit to take advantage of the subpoena power of the court to gain access to the books, bank accounts and more. Be prepared to spend some money on a good attorney and a good forensic accountant. They are worth their weight in gold, but be prepared to fight this over the long term. Finally, when you ask “how can you just leave?”, that’s a tough question. You’re probably owed a substantial sum of money. You are probably on the hook for a substantial sum, as a personal guarantee, especially if your name has been being forged on documents. What you need to do, is hire LOCAL COUNSEL (in the same city, hopefully) to represent you and figure this out. Good luck to you! Larry.
Tom J Edwards says:I am not a member of my company’s llc, but rather a longtime employee. After an inquisition by the company into my character, personal integrity, and business dealings I turned in my resignation. Before my 2 weeks is up I was considering having the company owner sign a hold harmless agreement to protect me from any future litigation or tax inquires as I was the company’s cfo. Do you have a template I could purchase for this, and what specific indemnities would you recommend I write in? I would be interested in submitting it to your editting service after it was drafted. I live in Missouri.
Larry Donahue says:Hi, Tom. Thank you for your question. You should really consult with a local attorney in MO, who can guide you through this. A general release, waiver and indemnity agreement should be helpful, and the indemnity should include any and all expense (including attorneys fees, court costs and expert witnesses) associated with your defense, testimony and/or involvement in any cause of action related to the Company and/or your position within the Company. It wouldn’t hurt to have a statement specifically acknowledging that you were never a member of the Company. Good luck to you. Larry.
Brad says:Hey Larry, I legally bought out 3 members in the LLC I originally formed and am the sole owner as of May 2016. In effect, I agreed to pay what was originally invested by each member. There was no income or significant loss (minimal expenses) for the year 2016. With all that said, do I still need to provide each former member a schedule K-1 for 2016 tax year? … or am I just classified as a single member LLC now and report on Sched C.? Thank you
Larry Donahue says:Hi, Brad. Technically (and assuming your tax year is the calendar year), you were a multimember LLC from January 1, 2016 to May X, 2016. You are supposed to issue K-1’s for that period of time to the them members, and the remainder of the year would be disregarded. You should consult with an accountant or CPA, so they can direct you on how to accomplish this properly, as well as submit your last tax return to the IRS. Good luck to you. Larry.
Joe says:Hi Larry, I have a question I am a 5% corporate partner in a friends Vodka company that I paid $350,000 cash for. I invested with my job related disability settlement so I would have something for my family future. I have not received any money in 2 1/2 years, I am not being involved or told about meetings or what in going on with company. When I asked for money or paper work to see how company sales are my friend/owner gets mad and offensive. I would like to get my 5% and leave company. But he said he can’t give me anything until if and when he wants to….Trying to find what I can do?!
Larry Donahue says:Hi, Joe. Thank you for your question, and I’m sorry for the trouble you’re facing with this “investment.” There are a lot of issues here, but in general, if you’re a “legitimate” owner then you have the right to review books and whatever else is necessary and appropriate. What I mean by “legitimate” owner, is that I’m worried about your statement where you said “friend’s Vodka company,” which sounds like perhaps you may have given over money without all the legal documents necessary to perfect your 5% ownership. You may not actually be an owner of the company. If you are an owner, you have a number of rights and you can force the company to comply. If you are not an owner, you have a cause of action as against your friend. Either way, you should consult with a competent business attorney in whatever jurisdiction you’re located and have that attorney look at the totality of the facts and circumstances. From there, that attorney should be able to advise you on a number of different options, depending on how serious you want to treat the matter. Good luck to you, and I’m sorry I cannot give you more specific advice. Larry.
Yvonne Villa says:HI Larry, I have a 50/50 partnership (LLC). We had named my partner the “managing partner” of the company due to her experience that she claimed to have. We’ve been in business for about 3.5 months and she has made some really bad financial decisions for the company. I do not attend regularly due to other businesses on hand. That is why we named her “managing partner” from day 1. We do have a partnership agreement, she has broken a couple clauses including not giving her initial capital investment. I have put my initial capital plus a little over 10 grand to keep the company afloat. She has not put a dime, and I have been always been given the run a round. I am trying to remove her as “managing partner” but because we have 50/50partnership and no silent partner to overrule any disagreements, she will not leave her position, she proposed to fire 3 people in order to keep her position. The problem here is not the office staff it is her not having management skills, making bad financial decisions and blaming everyone but herself on all the arising issues. My second option was to dissolve the company because I cannot contribute any more monies when she is not able to even match up any contributions I have made towards the company. How can one go forward with this?? If I can’t remove her from that position forcefully then is my second option the best thing here?
Larry Donahue says:Hi, Yvonne. I’m sorry to hear of the trouble. What you can do depends greatly on the Operating Agreement that you have and what state you’re located in. The Operating Agreement will control, and you should consider withdrawal options if available. If you have no Operating Agreement, you need to look at the statute that applies for the state that the LLC was formed in. Most states’ statutes will permit unilateral withdrawal if that is your wish, which will permit you to leave and to demand payment for your fair market value of your ownership. You probably CANNOT unilaterally dissolve the LLC, but again, that depends on the wording of the Operating Agreement if one exists. Good luck to you. Larry.
James Mathew says:Dear Larry, Greetings. I found your advice and responses to various questions great resource. I am writing this request from a country outside USA. I am one of three equal partners in a LLC where I am the managing director and signatory in one of the banks as per memorandum of association. But, one of the partners, who by local law owns 51% (on company registration) has taken control of the company. I have not been paid my monthly for almost a year. Now, like to come out of the partnership and all liabilities and also want to get the due share of the company which has a positive balance sheet. How can I resign from the partnership?
I am prepared to forego part of my dues for a smooth exit and release of any liabilities. I understand that you got to get paid for your service. I don’t know if I can afford your service. Could you assist me with your advice? Kind regards, James
Hi, James. I’m sorry to hear about your predicament. This is — unfortunately — more common than you may think. The answer to your question depends on (1) any Operating Agreement, (2) any other agreement that may exist between you and your partners, and (3) the state where the LLC is formed. Your options will generally be identified in the Operating Agreement and/or any other agreement that exists between you and your partners. If there is no Operating Agreement, or there is an Operating Agreement but it doesn’t address the issues you’ve raised (i.e. right to payments and right to resign), then you need to look at the limited liability company act within the state where the LLC is formed. The statute will cover these issues. For example, some states will permit members to resign and seek fair-market value for their ownership upon resignation. Other states prohibit this. So, I’m sorry I’m not giving you an answer here. It really does depend on the above issues. My recommendation is to hire a good business attorney in the state where your LLC was formed. That attorney, within a short period of time, should be able to give you an understanding of your options and the costs. Good luck to you! Larry.
Lee says:I am a 50% owner of an LLC in Texas. We do not have an operation agreement. I found out about some fraud that is going on in the company. In order to protect my certification, I asked to be bought out. They are refusing to do so and have found a investiture to buy them out, leaving me as a partner with someone I do not know. Can this person do this? Do I have any recourse.
Michelle S. says:Hi Larry.
My husband and I were members of an LLC. The other members were beyond difficult to work with, so we decided to bow out (it’s a start up that we did not invest any $ into and is still not up and operating as a business). We did a Withdrawal Agreement with Conditions Precedent to be met by the remaining members. These include the obvious Operating Agreement amendment and filing of LLC-12. It has been over a year and the LLC -12 has still not been filed. I am guessing the OA has not been amended either. Is there a way to find out whether or not it has?? We just want to make sure we are completely disassociated from this company (they choose not to file their taxes, or even pay their yearly LLC tax ).
Hi, Michelle. There really is no way to see of the OA is amended, short of an amended OA being sent to you for your verification. I will say, however, that it really doesn’t matter, although I’m a bit nervous about your “Conditions Precedent” which seems to imply the Withdrawal Agreement doesn’t take effect until such conditions precedent are satisfied. Hopefully, your Withdrawal Agreement will have some requirements to force performance on the conditions precedent, and if so, then you can claim a breach and force compliance. You should have an CA attorney review these documents, to advise you appropriately. Good luck. Larry.
NICK says:Hi Larry. I’m looking thru different resources in finding a business LLC expert like you . Your replys to questions are straight to point . This question will definitely be fun , I had been in a Father son , Step Mom Step Brother business for 17yrs ,Sold business that held a LLC 5 yrs ago .In 2008 My dad becomes ill with Dementia There was issues of borrowing monies , paying for autos, personal vacations etc .with myself . When My Father was involved we had many talks , He would try and talk about these issues and nothing but arguments would come they other partners .The last two years were the worst . the other partners started buy homes like wild fire . We sold business but kept the business property and leased the buildings , Partners never paid me a penny with saying will settle when we sell property,Unaware of sale 9 months they were keeping me unaware to force a action in court to lift my name of the deed, and filed a law suit for only ,giving me a 2 day notice too sign with no contract of sale, they dissolved the LLC the day before signing of title papers that has a closing date this week ,with saying I Am the cause of the winding up the business LLC , Now i found out there was a amendment in the business sale of title papers that excluded me by vote of partnership to show me only apart of the sell but sign paper at title saying they informed me about knowing , I am 25% there 75% took my father out of his% hes in a home , My knowing the business sale $ 2,300,000.00 million was actually 3,421,000.00 ? Now 2 days get to face them in court with me being sued by them for not signing papers for property , They don’t think i would ever find out , but thank god there sueing me and made me the finding out though this process of reading threw old emails saved ?
Larry Donahue says:Hi, Nick. I’ll be honest, I’m having some trouble understanding the circumstances and issues around what you’re trying to convey. It sounds, however, as though you have not hired an attorney to represent you. Otherwise, you wouldn’t have these very tight time constraints (i.e. “2 days notice”) and surprises (i.e. “$2.3 mil was actually 3.421 mil”). Wherever you’re located, you need to find a local, competent business attorney to help you here. If you are not adequately represented, you can find yourself facing default judgements, missing important deadlines, etc, and you may not be able to unwind the clock. You MUST HIRE A GOOD ATTORNEY ASAP, otherwise you stand to lose quite a bit of money and could have potential liability that you didn’t expect. I want to make it crystal clear for folks reading this: Not responding to legal actions or not hiring an attorney to represent you COULD BE IRREVERSIBLE. It’s not an excuse to say “I didn’t have a lawyer at the time.”
Andrea Martin says:Hello, I am in an S Corp as a 50% partner. My partner is a disaster and caused a lot of problems that led to financial losses. I personally have over 100K in the business and she has 0. I would like to leave the company and start my own without her involved. The company at this point owes around 55K to various vendors. Can I leave the company and its debt to her? I will still have far more debt as I won’t get my money back that I invested but I will be able to start again without the anchor around my neck that is a bad partner. The nature of my business (event planning) is that I can go out and still use my past projects on my resume. It is important to me that my reputation stays intact despite the bad actions of my partner so I can continue to book artists and vendors for my events. Thanks,
Andrea Martin
Hi, Andrea. This is a very good question, and unfortunately a difficult one to answer. The quick answer on whether you can simply leave the company and leave the debt to her, is going to depend on your Bylaws and failing that, what the statute says in the state where your company is incorporated. State law does vary in this respect. Check to see if your bylaws have any language relating to voluntary withdrawal and/or restrictions on your shares. My quick answer, however, really leaves out a number of important issues for you that are a factor for you. First, when you say the company has debt, does that mean the debt isn’t secured by your personal guarantee? If you did sign a personal guarantee, you’re not going to be able to walk away from that debt. If you didn’t sign a personal guarantee, then there’s hope. Second, are there other documents that control here? For example, did you and your partner sign a “buy/sell agreement” or “shareholders agreement” or “restriction agreement” or anything else relevant? If so, look to those documents. Third, is it possible to arrange for some sort of “deal” with your partner, where you sell her your ownership interest for some low value, in return for the company taking all the debt, etc? If you can get her to agree to this, it would be a preferred option but please make sure you both sign an appropriate “share purchase agreement” between the two of you. Forth, if you cannot get her to agree to purchase your shares and you find a way to voluntarily withdraw from being a shareholder, note that the company could claim your clients / business / past projects are company property and potentially go after you for “theft of trade secrets”. You need to tread cautiously here, and again, this favors some sort of agreement where she’s purchasing your shares and acknowledging certain clients or projects that are “yours” and can be pursued outside the company. Obviously, you would be best served to hire a competent business attorney in your jurisdiction. Good luck to you! Larry.
Gregory Rossi says:Hello-
I have been a 30% partner in a LLC business for the past 4 years, My partner and I have agreed to dissolve the business as of June 2017. As this business is run from the home of my partner, I have had no access to the books. I recently checked with our business accountant and have found that the books have not been handed over to her at all this year and I am quite alarmed by this. Furthermore I have no access other than the account number to the business account. I have been paid a portion of my distributions for past years but most of the money has been left in the business. My partner has been unresponsive to my requests and unwilling to discuss the state of the business. I do know that we have ceased all business operations as of April.
We did not have an operating agreement, I do have K1 and partnership accounting documents which I believe is enough to prove my role in the partnership. At this point what I want (and have expressed) is to complete the closure of this business and obviously to recover my profit distributions due. I have a growing suspicion that my partner is up to no good and may have taken or has the ability to take the profits from the business accounts. Do I have a right to remove my share of the profits (30% of distribution funds owe, as i already paid personal taxes),from the account (excluding 2017 profit/loss)?
And how do I release myself from any future involvement with this business if his intentions are to keep the business running or not.
Thanks
Greg R.
Hi, Greg. Thank you for your question. This is a very common problem, and the answer I’m about to give you will depend on the specific facts, and state where your LLC is domesticated. First, if there is no Operating Agreement, then you need to look to your state’s laws on the “default rules” that govern the formalities of the LLC. Typically, most state statutes will have rules governing issues like dissolution, naming a tax partner and dissolution partner, and withdrawal. Second, while there is some variance in state law regarding the issues I just identified, most states are universal in the following: All members are entitled to access the financials / books of the business, and all members have a duty of loyalty and fiduciary duty to the company. These rules can cut both ways for you, given what you outlined above. For instance, do you have a right to remove your share of the profits? The answer is generally “yes,” but if you’re wrong about what your share of the profits are, you run the risk of “stealing from the LLC” and thereby violating the fiduciary duty that you would otherwise claim against your partner. Also, given you’ve agreed to dissolve the LLC, there is a process that generally involves consolidating and liquidating assets, and then paying according to a legal priority (i.e. debt / lien / note / mortgage holders first, etc, etc, depending on your specific state laws). You wouldn’t want to be guilty of frustrating the efforts to properly wind-down and dissolve the LLC. If you suspect “foul play” and/or fraud by your partner, you can always sue him claiming a breach of the fiduciary duty of the company, fraud, embezzlement and more (depending on the specific statutes of your state — talk to a competent business lawyer in your jurisdiction). The problem with these sorts of lawsuits, is they are expensive — you usually need to hire a forensic accountant, pay them as much or more than your lawyer, and then debate about the facts (i.e. what you think were personal charges weren’t actually personal charges, or you cannot prove they were personal versus for the business, etc, etc, etc). It’s almost impossible to win legal fees in such a lawsuit. Therefore, unless the amount in controversy is a LOT (think at least $75k or more), you may end up spending more fighting about it than collecting on anything. How do you get released from any future involvement with the business? There are two ways: First, by a separation agreement, release or vote of the Members. This would be the easiest, most cost-effective and sure way of getting out. The other way is to check what your state’s statute says about this. In New Mexico, Members are permitted to unilaterally withdraw (or called dissociation in some states), after notice (See Section 53-19-37, Voluntary Withdrawal of Members). The same for Illinois (See 805 ILCS 180/35-45). In Texas, however, Members are forbidden from withdrawing (See Sec. 101.107). Remember, these are “default rules” which may be overridden by an Operating Agreement. If you cannot amicably resolve your dispute and withdraw, I would strongly encourage you to seek representation by a competent business attorney in your jurisdiction. Good luck to you! Larry.
Eustace Okine says:hello, i want to ask if it is possible for two partners to dissolve a partnership all for the sake removing a third partner and latter reconstitute under the same name, address, facilities and client list. if yes can the third partner sue
Larry Donahue says:Hi, Eustace. That’s a good question. Please see my previous answers regarding this. In particular, the question on whether two partners can dissolve without the third’s vote depends on (1) the Operating Agreement, and (2) the statute within the state of where the LLC is formed (if the Operating Agreement either doesn’t exist, or doesn’t speak to the issue). In general, dissolution would require either a unanimous or at least a majority vote. Again, the Operating Agreement (or statute) will indicate what is required. Let’s assume for the sake of the discussion, that it’s permissible to dissolve with the two partners as you’ve indicated. The bigger question for you is, can you reconstitute under the same name, address, facilities and client list and not get sued? I would say no, this is not possible. Here’s why: First, read our article about Successor Liability I think your new company would clearly be considered a successor entity, and therefore, any liabilities (even owed to previous owners) would attach to you. Second, in order to “dissolve” a LLC, you really need to “unwind” the LLC properly. This includes liquidating assets, and distributing assets as required in the Operating Agreement or statute. Therefore, how could you create a new company, using the same assets, if you’ve already liquidated the assets to unwind it properly? Basically, this would sound like a “sham dissolution,” which could be challenged. Sorry for the bad news. My recommendation is to hire a competent business attorney in your jurisdiction, to look at the facts and circumstances and documents, and perhaps he or she will figure out other options for you, given whatever issues you may be experiencing with your third partner. Good luck to you. Larry.
Sarah says:I am a 50% member of a 2 person LLC. My partner and I are no longer in agreement with how the company is being run. We have discussed a buyout but cannot agree on the amount that the other partner is requesting. What are my options at this point? This is a design company and I am the creative partner. I don’t believe there to be any value to the company as there is no cash on hand and all profits have been paid out through salary/distributions. However, we are currently under contract with 1 client on retainer for several more months. Can the company be forced to dissolve if we can’t come to an agreement? And what would be my rights be moving forward as I would like to continue in my industry? How would the current contract we are under be handled? In addition, I have discovered that my partner has formed 2 additional companies in another industry but continues to draw an equal salary from our company. Our company was started without a formal business plan and there is no exit strategy in place. Any information or advice would be appreciated.
Larry Donahue says:Hi, Sarah. Thank you for your questions. Unfortunately, it would take writing a book to adequately answer you. This is really something that requires you hire a competent business attorney in your jurisdiction, to look at the facts and circumstances and documents, and perhaps he or she will figure out other options for you. The quick answer is you may be able to force a dissolution, but it depends on the wording of your Operating Agreement and if that’s missing, the statute of the state where your LLC is formed. It may be perfectly fine to own other businesses, provided they aren’t violating the duty of loyalty, fiduciary duty and/or any employment contracts setup. Even if you could force a dissolution, you’d still be required to “wind-down” the affairs of the LLC properly, and that means you still need to address that one client. Therefore, I don’t see a dissolution (assuming you can force the issue) as really solving your problem in not being able to agree with your (soon-to-be) partner. I don’t think you need to end your livelihood, just because this LLC did what you will do going forward. You just don’t want to “reuse” or take control of LLC assets without an effective wind-down. Good luck to you! Larry.
Leasa says:Hi Larry, I have a detailing business LLC and my partner wants out due to not being able to invest time into the company. Can I make up a form that states that he is voluntarily leaving the patnership? I am buying him out on an agreed amount. Also will he have to file any kind of tax form in 2018? The business has been in operation for past 6mths.
Thanks, Riley
Hi, Riley. Yes, you definitely want to create a document that evidences the separation. It should include things like the exact date of separation, how much you’re paying him, how you’re handling any special circumstances (i.e. will he still be a personal guarantee on anything, such as a lease, line of credit, CC or loan?), and that you will each indemnify each other as appropriate (you need more precise language than that, of course — i.e. will you indemnify him against any lawsuits that he’s named after he leaves? What about a lawsuit involving something that happened when he was a partner)? It would be best if you consider hiring a business attorney you trust to work through this document with you. As for taxes, he’s responsible for taxes as a partner up and until the day he leaves. Therefore, if December 31st, 2017 is his last day, he’s going to need to receive a K1 from the business for 2017 taxes to be filed in 2018 (assuming a passthrough entity). Good luck to you! Larry.
Corrinne says:Partners in a dairy farm. One partner wants to leave with his share of cows and quota and one partner says he wont let him what can we do
Larry Donahue says:Hi, there. I’m sorry to hear about the difficult situation. Whether a partner can leave depends on the formation documents, and if no formation documents, then the law as applied to the specific entity of the farm in the particular state where the farm is formed (as an entity). If the partner is permitted to leave, either by contract (i.e. the formation documents) or by law, that partner may not be permitted to simply take “his share of cows.” There would either be a formula on how to calculate what a departing partner is permitted, or some process to follow. Rarely does it mean they can take assets of the business. Instead, it means the business needs to reimburse them (usually in cash). The only way to take actually assets (i.e. the cows) would require some sort of dissolution of the entity or partnership that makes up the farm. Then, you would follow the contract (i.e. formation documents) or law, on how to handle assets and liabilities, which could involve disbursing assets of the partnership ONLY AFTER all the other liabilities have been taking care of. In general, this is not an easy problem to deal with. I strongly encourage you to seek the advice of a competent business attorney in your jurisdiction. Good luck to you! Larry.
Alison says:Hi there, I started an LLC partnership. The business itself, I created and built a client base and then asked a friend to join. Mistakenly, I went in 50/50 partnership LLC. We have not made any profits and each put in the same amount of capital which is severely insignificant. We agreed to dissolve the partnership three months in, she’s too overwhelmed. She doesn’t want me using the name. How do I turn this partnership into a single member LLC? Do I need to change my tax ID number? Im so lost and every time I try to get someone on the phone in California (state, irs, etc) I get more confused. Also…we never signed an operating agreement. Thank you.
Larry Donahue says:Hi, Alison. Honestly, it sounds like you got through the hard part: Getting your ex-partner to agree on ending it. Now, what to do next? I’m a bit confused, because you said “dissolve the partnership” and “she doesn’t want you using the name.” I interpreted those statements to mean, that you’re closing down the LLC entirely, versus changing it. So apologies if I don’t answer your question exactly. I think you have one of two options: (1) Dissolve existing LLC, form a new one by yourself. Benefits: Clean and definite. Disadvantage is the expense of forming a new LLC (although it’s not that bad — we do it for a low-cost flat-rate fee — see https://www.l4sb.com/services/business-formation/form-limited-liability-company/). Then, simply get a new FEIN for the new LLC. (2) Change ownership (and name) of existing LLC. Benefits: Perhaps a bit cheaper than #1 above, keep existing goodwill, contracts, relationships, bank accounts, etc, of existing LLC. Disadvantage is that you need to amend your Articles (to change the name), and you really need some sort of “separation agreement” that indicates you’re taking the LLC fully, and your partner no longer has any right, claim or interest in the membership interest of the LLC. If you go this route, the separation agreement (and a new Operating Agreement) will push it into single-member status. Do you need a new FEIN? It depends. The IRS has a helpful guide you can reference, located here: https://www.irs.gov/businesses/small-businesses-self-employed/do-you-need-a-new-ein. Good luck to you! Larry.
Lisa Bage says:Hi Larry, I work for a company that is a Texas Llc. There are two members, husband and wife equal in ownership. They are recently divorced. In the divorce decree the husband is giving over his ownership to her. Because of evidence of him taking $ out of the Llc for his other business, it over compensates for the 2,000.00 he put in when the company was started. He agreed in the divorce settlement to no funds back to him, and that he would remove himself. Now, the bank is not letting us take his name off the acct without new Llc docs, and he is dragging his feet to turn over a resignation letter. Is there any other way to remove him? Thank you, Lisa
Larry Donahue says:Hi, Lisa. I sincerely apologize for the delay in responding to you. Our system doesn’t always alert me to certain posts, although it does to others. I’m just going through the system now, and finding a good number of questions I’ve failed to respond to. Again, my apologies. At any rate, it sounds like the ex-wife needs to enforce the divorce settlement, unfortunately. That shouldn’t be too difficult, although it does require a motion in DM court. Sorry. Larry.
CC says:My ex husband resigned from the LLC in our divorce in 2016.
He never worked 1 day in the business, I am there all the times, and now almost 2 years after the divorce, he is demanding the company financial statements of years 2012, 13, 14, 15.
I am sure there will be no good coming from it as he is still suing me over something frivolous.
I refused to provide it, as I truly think it is not his business anymore, and he had tried so hard to get more money from me. I am not sure what other tricks he will pull if he has the access to these records.
I did all the hard work, and it was just that his name was on there as a member ( manager), as I trusted him wholeheartedly over the years.
My question is do I have to release these records to him by law, he’s threatening me and my CPA to give him copies.
We both think he should have no right to access it, though he was a 50% owner before, but after divorce, all rights are exclusively granted to me for past, present and future operation about the business. Please advise, thank you!
Hi, there. I’m sorry to hear about the trouble you’re having with your ex-husband. At the end of the day, whether your ex-husband is entitled to anything depends on (1) whether he’s a member of the LLC now, and (2) what your marital settlement says. If it is, as you say, that your divorce grants you “all rights” to the company, in the past, present or future, then it doesn’t sound like your ex-husband has any legal claim to those records. With that said, I want to strongly encourage you to seek legal advice from a competent attorney in your jurisdiction. In particular, you want to find an attorney who is BOTH competent in “DM” (which stands for “domestic matters”) and business law. That may be a hard combination to find, so you may need to consult with both a DM and business attorney. Every state does have its own rules, laws and guidelines, so please do not take my words above as actual legal advice that will apply in your jurisdiction. Good luck to you. Larry.
Rodel V. Rivera says:Larry, I have been 40% share in our company, but I feel im carrying the bulk of the work load . Im bringing almost 4million every year and my partner who own 60% bringing only 700,000/year. I gave him some idea how to increase his sale but its show he is not interested because he secured on my sales. Im tired of doing this so im thinking to resign from position as Manager of the Commercial Department. The other problem is we don’t have a our share agreement . Can I resign from my position and later on sell my share to him?
Larry Donahue says:Hi, Rodel. I sincerely apologize for the delay in responding to you. Our system doesn’t always alert me to certain posts, although it does to others. I’m just going through the system now, and finding a good number of questions I’ve failed to respond to. Again, my apologies. The quick answer to your question is, it really depends on the “formation documents” of your company. If you have a LLC, you should refer to your Operating Agreement. If you have a Corporation, you should refer to the Bylaws and any other docs, such as a Buy/Sell Agreement. Typically, these documents will have some sort of exit or withdrawal provision. If they don’t restrict or prevent withdrawal, you then should double-check your state’s laws on withdrawal. Most states will permit a withdrawal — unless prohibited in the formation documents. When you withdraw, you are usually permitted to demand fair-market-value for your ownership percentage. You really should speak to a local, competent business attorney to guide you properly. What you want to avoid, is a bitter fight or do withdraw improperly (exposing you to potential long-term liabilities). Good luck to you! Larry.
John says:Hi Larry, I have a small start up. We set up the LLC before we named the company using our last names, and it was agreed I was 80% and he was 20%. It was agreed that we would both share the start up costs of the business, although he never gave any money towards it at all. I asked him for a check and he said he would pay it soon, and continued to delay me and said that he would send it soon. I have now put 30k in and he has not eben given one dollar, he finally said he cannot afford to put money in now. But still has the contract sighned at 20%, which sayd on the front that we both have zero investment ( his idea ). I ask hm do help with the buisness and do things and he promises to get them done and is very slow to do so if not at all. So i. am left putting the money in and doing all the work for a comany that has not even launched yet. It’s just a small interent start up, with my personal savings and I asked him to leave and he said he would not. We discussed going down to 10% for help only and no investment, but he still hardly does anything. What do i do? I would really appreciate your expert opinion.
Larry Donahue says:Hi, John. Sorry to hear about this. If you’re giving cash to the business for startup, it can be classified as a loan and you want to make sure that money is reflected on the books so that if you close or dissolve the company, your loan would be one of the liabilities that would need to be paid when liquidated the business. The bigger issue is, do you want to stay partners with this individual? If he’s been leading you on with something as important as cash, and then unwilling to compromise when he’s incapable of fulfilling his promise to you, he’s showing you his true colors. Maybe it’s better he does this now before you get in too deep. You have some options, depending on the specific wording in your Operating Agreement and laws in your jurisdiction — which means you really need to hire a local business attorney to verify what I’m about to tell you. First, it’s very likely your formation documents (i.e. Operating Agreement) has a capital call provision in it, which usually is worded in such a way that if the company needs money, the members have to give money and if they don’t, they lose equity to those who do give money. If there is such a provision (or if not, your state’s laws default to this), then instead of treating your money as a loan to the business, you can treat your money as a capital contribution that entitles you to additional equity — which would dilute your partner’s percentage ownership. Your second option, is to simply accept his “sweat equity” for now, and work towards implementing the first option if your Operating Agreement (or state statute doesn’t cover this). Your partner will dilute over time, as you bring in other investors / partners. Your third option, is to terminate his employment. He will continue to retain his 20%, although you can work with an attorney to figure out how to dilute his ownership over time. Your forth option is to close / dissolve the business, and liquidate whatever assets it owns. Start over with a different ownership structure. You need to be careful how you do this, of course, because you need to follow your Operating Agreement (or statute) to the letter. But, it may be permissible. Good luck to you, and I hope this has given you some ideas on how to proceed. PLEASE DO NOT TAKE ANY ACTION, HOWEVER, WITHOUT CONSULTING WITH A COMPETENT BUSINESS ATTORNEY IN YOUR LOCAL JURISDICTION. Larry.
Lauriano says:Hey, Larry.
I’m going through a similar issue currently. If you have a moment to spare some light, that would be most helpful.
I have a 50-50 partnership in the Construction business so to say. We have a signed Partnership Agreement stating we have equal partners. Her personal life has taken over and she now wants to move out of the country in 3 months with her boyfriend. As she decides to create ALL positions below a CEO/COO. Then try and manage/collect payment while she is overseas. In the meantime, she wants me out of the company 100%. She did create the company on her own and ran the company by herself for 7months until I came on as a partner. She’s throwing out words about fairness and hasn’t think I’m working just as equally. But, I devoted my life to this. Putting money right back into the company as she has (just not as much of course, since I came on at a later date). She wants to offer me 2 options that drops my share down to 5% which I am currently not inclined to do whatsoever. This is the start of the busy season for us. And, a ton of money and work is on its way. I’m at a lost for words and seeking advice. She is not interested in buying my shares, since she doesn’t think its “fair”. This all happened in less than a months span. I’ve been blindsided and would like to know your take when you have the time. Thank you.
Hi, Lauriano. Really annoying for you, but at the end of the day, this is a business. It’s not about “fairness,” although it appears her definition of fairness isn’t exactly what mine or yours would be. My advice to you is the same: Both of you are permitted to do what’s permitted in the “formation documents” and in statute. Your Partnership Agreement controls, in the absence of anything else. Doesn’t matter who “started the company first,” or who has put more money into the company (because more money is reflected in the capital account — or it should). Please seek the advice of a competent business lawyer in your jurisdiction, and get his or her opinion on this. Without knowing more, my knee-jerk reaction is to politely push back and indicate that you’re not doing anything that is outside the Partnership Agreement, although you’ll certainly entertain any “fair” offers that compensate you for giving away more than you’re required to in the Partnership Agreement. Good luck to you! Larry.
John McMurry says:I have a quick question. I am 30% in a medical practice while my partner is 70% I am the only one in the office as he is in another practice. I have built the practice up to the point of needing more staff. I am wanting to exit and do go down my own path. If I tell him I am going to be leaving he will not want to by me out nor do I want to buy him out. At this point is the most logical option to dissolve the practice?
Larry Donahue says:Hi, John. Dissolving the practice is certainly an option, provided you both agree or if you don’t both agree, the formation documents support a dissolution. I would strongly encourage you to think through all the issues before going down the dissolution path, given your practice appears to be doing well and you need to expand. For example, assuming you will want to immediately form some other company to take over the business of the old company (i.e. given your growth), think about what that entails: New bank accounts, payroll, contracts with insurance companies, renego with your landlord, etc, etc, etc. Furthermore, assuming you can dissolve cleanly (i.e. no straggling liabilities to deal with, such as a lease), your new company will be subject to all the liabilities of the old company under the theory of “successor liability.” Finally, don’t forget about the loss of credit associated with the former successful business. In the end, all that work is worth something, isn’t it? If neither you or your partner are willing to buy each other out, at least negotiating something related the expense of everything I’ve mentioned above would be worth paying to your partner, versus dissolving and starting all over. Despite my advice above, please consult with a local, competent business attorney to review your formation documents and the status of your business, to give you well-reasoned options. Good luck to you. Larry.
Lynette says:Hi Larry, My husband is in a partnership LLC company in CO, he & another person are small percentage owners, > than 10%. He wants to buy out the majority owner & they are in negotiations. My husband has been with the company for 12yrs & most of that time he has been managing the company even though he is not the managing partner. He was made partner 5 yrs ago. He just want to take over & purchase his partner’s shares & continue running the company. The price is fixed, the majority partner wants out, & we will pay cash at closing, however he still wants to work for the company for a salary & benefits as an employee, but doesn’t actually want to work. He is wanting this as an indemnity, among others, for his potential liabilities until we get his name off of all vendor & sales tax authorities, etc. We want to take him off of those before closing, or if that isn’t possible, with in 30/60 days of closing & don’t want to pay him as a worker until the end of the year for that (we are ok with him staying if he actually works).
Couldn’t we, in the separation agreement, state that we will either have him removed from all liabilities–which I need help with that, as I don’t know how to do that–by closing or by such and such a date and if that does not happen then this is the indemnity we agree to–which is the other part I need help with, what is a equitable indemnity until he is off of all liabilities?
Thank you
Hi, Lynette. You could do that in the separation agreement, but I find that it’s very difficult to get a significant owner off all the liabilities before closing. There is a practical problem: Before closing, you don’t actually own a majority of the business — therefore most vendors, especially banks and merchant account providers, are simply going to be unwilling to remove major owners until they are actually non-owners. Then, if you have actual lines of credit, credit cards, etc, they may be unwilling to ever let the majority owner out of a personal guarantee, without shutting down the account and/or refinancing. And, you cannot shut down accounts and/or refinance, until you own a majority or all of the company. So, while you can negotiate anything with the seller in the separation agreement, there really is a practical aspect to all of this. It sounds like what the seller is proposing is just fine, and we see that sort of arrangement all the time. The trick is, to put enough contingencies in the employment agreement, so that you don’t end up paying an annuity forever. You can implement time-limits, as well as require active participation to help remove him off of the liabilities. Good luck to you! Larry.
Lynette Cirbo says:Hi Larry, Thank you so much for your answer! That is where we were headed and then we found out our partner doesn’t really want to sell after all. So we are now going to a 50/50 partnership and that is where my next question comes in. Let’s say we need 100K to buy in enough to be 50/50 partnership but we only have 50K in cash and now we want to pay him the rest out of the company. Do we do distributions–say 5k to partner (which is just his, nothing to do with loan) and our 5k (since distributions are at 50/50) but we give him our 5k towards the 50k left owing to him. Or can we say to him, you get all distributions until you are paid back the 50k we owe you, and then after that we can do distributions on the 50/50 percentage of ownership? I think we would have to give him a interest rate percentage too on the money payback because is is a loan from him to us. The first example gives him 100K before he is paid back the 50k we owe him and the second way only pays him back the 50k plus interest. Or do you have a different method? Thank you!
Larry Donahue says:Hi, Lynette. I’m not sure I’m following you, so apologies if my answer misses the mark. At the end of the day, whatever the partners are willing to accept is fair game in negotiation. I would recommend, however, that you consult with your CPA / Accountant, to make sure you fully appreciate and understand the tax implications for how you might structure a deal. For example, if you’re taxed under Subchapter S, then you have to do distributions according to pro rata ownership. You cannot say “you get 100%” of the distributions, and expect to maintain your Subchapter S status — or the taxes get wonky (i.e. you still get taxed on your portion of the distribution). If you can get a departing partner to agree to be paid over time, that’s always a good thing. I would recommend a strong separation agreement, which would spell out the terms for payment for the ownership percentage being redeemed back into the company. Good luck to you. Larry.
John K Kovach says:Larry,
Thank you for your generosity in answers our questions. Hopefully you can answer mine.
I have a Ltd LLP that has two LLC’s as General partners and two individuals as limited partners.
One of the LLC’s along with the individual want to be bought out.
Besides an agreement between the individuals being executed and their LLC’s and filed in the partnership documents are there any IRS forms that need to be filed?
The responsible party registered with the IRS is not leaving. Do I just stop sending K-1’s?
I am a partner and I plan on leaving the company in the next few months. I have signed guarantees on a couple of large loans. Am I entitled to be compensated for these guarantee?
Larry Donahue says:Hi, Lori. Thank you for your question. The answer to your question is a tough one. When you say “compensation” for these guarantees, what do you mean? Are you expecting them to pay you for continuing to be a personal guarantee? If so, how much would that be worth, and does that mean you accept the personal guarantee and are willing to continue to be jointly and severally liable? Usually, in these circumstances, what is standard is that you have a “separation agreement” that indicates the company will refinance the loans, so that you’re removed as personal guarantee from the old loans. You can give them some period of time to get this done, and perhaps have some sort of “penalty clause” that kicks in, if they miss their deadline (assuming they are willing to do that). There’s really no legal way (short of whatever is in your formation documents) to force them to agree to this. You definitely want to demand that they indemnify and hold you harmless from those loans. It’s a precarious position you’re in. I strongly encourage you to hire a competent attorney to help you though this negotiations and document drafting. Good luck. Larry.
Graciela Fuentes says:Hello, Our TX LLC added a third member on 10/27/17. This changed the owner percentages to 37.5%, 37.5%, and 25%(added member). Suddenly, we couldn’t get a hold of the added member(25%) for like 5 weeks. He then texted that he had changed his mind on being a member and wanted his money back. We told him be couldn’t pay his money back immediately. It would take a few years. He said to take the money as a personal loan, pay when we can, and remove him as a member. We agreed and took him off as a member. The remaining members filed taxes as 50% each. Was this okay or was he supposed to file taxes for his short time as owner?
Larry Donahue says:Great question. And, there isn’t a specific “rule of thumb” on how to handle this, that I’m aware of. Aside from the advice I’m about to give you, it wouldn’t hurt for you to double-check with a CPA or accountant to see what he or she says. My two cents, for what it’s worth, is as long as this third-member hasn’t obtained any income from this company, hasn’t acted on its behalf, etc, so that we can view this as a bit of an extended (i.e. 5-week) ownership negotiation that just didn’t pan out, then I think what you did is probably fine. If, however, there was some sort of income distribution to this third partner, or this third partner was doing anything that could potential turn into liability into the company, then perhaps you may want to be a bit more formal about this (i.e. partial ownership) for a small period of time he was “owner.” Thank you. Larry.
Steve S says:Thanks alot Larry… I had been to many other sites about this topic and yours was definitely the most clear and informative . . .Really appreciate it . . Thanks!! My soon to be Ex and I have an LLC in MN, no operating agreement, just filled out the online form at SOS and called it good. Thankfully everything is noncontested so just need to resign/withdraw myself. Since the business has no assets or long term liabilities I guess its really just about a lil piece of mind Thanks again… I’m sure I’ll be back
Yardley Burgess says:i recently bought out my business partner. We agreed that he would get a 1/3 of current money on hand and 1/3 of the inventory. He received his buyout and then deleted social media accounts belonging to the company along with potential customers. He has made a big wholesale sale to a company we were in talks with. He closed this deal and informed the customer of my supplier for my products and said this business can use photos from the business website in their sales catalog and website. If he signed away all rights and property of the company what can I do?
Larry Donahue says:Yikes! It sounds like there are two issues here: First, that he deleted, sold or destroyed valuable property of the company (i.e. social media accounts, photos, etc). Second, he disclosed supplier information and/or created a competitive situation against your company. In regards to the second issue, there really isn’t much you can do about it. This would have been exactly the sort of thing that would need to be placed in a separation agreement. To maintain confidentiality, non-solicitation and non-competition, at least for some period of time (1-3 years is standard). In regards to the first issue, you can certainly make a legal claim for the company property that he deleted, sold or destroyed. He had no right to do that, and the company would certainly be entitled to damages.
Lorene C Nord says:Hello, I was in the process of beginning a new LLC business with two other partners but pulled out prior to the business start date. LLC business operating agreement was signed. I had started the website, mostly done but not quite and it was in my name, connected to my email and personal credit card. It couldn’t be transferred to another account so I removed the site. I told my partners they could have the domain name if they could figure out how to keep it. Weebly told me it could not be transferred. Is this OK. Also, I was told by a friend who is a lawyer that because the business hadn’t started there could be no backlash from the other partners because no business at this point had been provided or begun; is this correct. We split all costs 1/3 each and have no assets at this time except the business will keep cards and fliers, materials purchased. I removed myself from the bank,they still have to sign but I signed. My husband had been newly diagnosed with a serious disease so left the partnership prior to the start date. I was told by them they could make a change to the LLC license themselves and I didn’t need to sign. Shouldn’t I get a copy to ensure my name was removed? Needing advice, thank you
Larry Donahue says:Hi, Lorene. I think you (or this other lawyer you’ve talked to) is confusing “business start date” with company formation date. You formed the company the moment everyone signed the Operating Agreement, and the only way to answer your questions is to look at the Operating Agreement. Does it permit someone to unilaterally withdraw as you have done? If so, then you may be okay although I would strongly encourage you to follow what I outlined in this very blog article. Otherwise, if the Operating Agreement does NOT permit unilateral withdrawal, then what you’ve done is NOT fine. You really need to follow the requirements of the Operating Agreement, and conclude with some sort of signed document that you are indeed withdrawn and the withdrawal date. Good luck to you. Larry.
Lorene C Nord says:Yes it does allow a partner to withdraw in the operating agreement. Here is how it reads:
7.1 Withdrawal. Members may withdraw from the Company prior to the dissolution and winding up of the Company (a) by transferring or assigning all of their respective Membership Interests pursuant to Section 7.2 below, or (b) if all of the Members unanimously agree in a written consent. Subject to the provisions of Article 3, a Member that withdraws pursuant to this Section 7.1 will be entitled to a distribution from the Company in an amount equal to such Member’s Capital Account.
I have a text from them where they are in agreement with my departure. I think it should be written into a separation agreement to make it official/legal. They will split my shares equally. We split the costs and they started their own website independently of me and after the date of separation.
We were in the process of adding specifics but never did to the operating agrrement as well after the original was sign as it was a generic operating agreement not sure if that means anything but it, the addendum was not finished or signed.
Anyway am I considered legally out?
Hi, Lorene. I assume you’re trying to invoke 7.1(b) of your Operating Agreement, which permits a withdrawal “if all of the Members unanimously agree in a written consent,” because you “have a text from them where they are in agreement with [your] departure.” I further assume you’re not trying to invoke 7.1(a), given you didn’t include 7.2 to review. The question I think you’re trying to ask is, “Do texts agreeing to your departure amount to a unanimous written consent according to 7.1(b) of your Operating Agreement?” The answer to that question is NO, you’re not there yet. You mention an addendum, but given we have no idea what it says nor that it’s even signed, I’m not sure the relevance there and so cannot comment. Are you “legally out?” No. Larry.
Lorene C Nord says:Ok so it sounds like I need an official seperation letter stating this is an uncontested departutre assigning my shares to the other two partners and add verbage that releases me from all legal and financial responsibility of business from the company as of the seperation date. Right?
Grace says:I had formed a LLC with two partners and got a certificate from the secretary of the state in Texas. Three months later, I decided to leave the company and hand over the business to the two partners and walk away with nothing. We are making money for the business. We did not sign the the Operating Agreement and have no rules for this situation. We have a bank account. The bank requires a minutes to remove my name from the account. My partners do not want to sign any documents regarding my resignation. Any suggestions for my case? Thank!
Larry Donahue says:Hi, Grace. You need to speak with a TX attorney versed in the “Texas Limited Liability Company Act” (or TLLCA), who can advise you on options. Specifically, the TLLCA does not permit withdrawal of a member, unless permitted in the company agreement. You need to seek other ways to withdraw, if possible, and a TX attorney can help you understand the options, along with with the risks. For example, you may be able to sell your interest to someone else. Or you can sell your interest to one of the existing members. Good luck, and I’m sorry I cannot give you more information about this. I am not a TX attorney, and therefore cannot give you sound advice about the TLLCA. Larry.
Grace says: Thank you so much for your suggestions, Larry.Hello!,
So I have a Delaware based LLC. We are currently working on removing our CFO who has 15% equity in the company. Is it possible to regain that equity after he leaves? Little back story, he is very toxic to the company and will not preform the required actions. We think our first step would be to remove him from his duties by a majority vote. But how do we get him out of the company and regain his ownership?
Hi, Christopher. Thank you for your inquiry. The answer lies in your formation documents (i.e. Operating Agreement). Does it permit member removal and does it have a dispute resolution process? If not, you’re going to need to look toward DE statute, as well as the local law where you folks are located. If you’re in NM, TX, FL or IL, I can point you to the right lawyer. If you’re in another state, I recommend you find a good business lawyer in your local jurisdiction who can walk you through this. You can email us at LearnMore @ L4SB dot com. If the individual is as toxic as you say, you can probably expect a fight. That’s why you want to consult with an attorney first, so you know what your options are and you approach it very methodically, based on what the Operating Agreement (or Statute) requires. Good luck to you. Larry.
Natalie says:Hi Larry,
My husband has an LLC with one partner. The partner just came to us and wants to leave by Sept 1. We have a lease til next April that we can’t get out of along with property taxes and bills along with the store. He is telling us we have to buy him out…but in Kentucky isn’t the partner that’s leaving have to offer his buy out after all debts paid? There was no written agreement just a signed lease with both their names on the store. We have already decided on equipment, inventory but he is staying he isn’t responsible for what’s left on the lease since he is leaving company. We have just started contacting lawyers now. TIA
Hi, Natalie. I’m sorry to hear about this. What will dictate what your partner and your husband can or cannot do, will first be the Operating Agreement if there is one (I’m assuming not based on what you said above) then KY statute. Because I am not a KY-licensed attorney, I really cannot weigh in on KY law. I’m sorry about that. Contacting a local attorney who knows the KY law around these issues is the right next step for you. He or she will be able to advise you and your husband on your options, rights and potential next steps (with associated costs and risks). Good luck to you, and sorry I cannot be of further help. Larry.
Karen says:I am currently a partner in a LLC business that has not opened for business yet. My partner recently filed for divorce from her husband and now states she will be unable to contribute any more time and money to the business. Can I sell my portion of the business to another party if she agrees and take a loss on my taxes if the sale is less than what I have invested?
Larry Donahue says:Hi, Karen. If your partner agrees, you can do just about anything (just make sure to get everyone to sign some sort of document that states what’s going on). It’s only if your partner doesn’t agree, do things get complicated. Good luck to you. Larry.
Al Williams says:Mr. Donahue,
My wife’s father founded two LLC’s, the first is being used to manage the development of a tract of land into some high end homes, while the second is being used to manage the sale of a separate tract of land for commercial development in the state of Louisiana. In both cases he put land that was inherited into the LLC’s in preparation for the intended end use. He is nearing the end of his life and has presented my wife with his Last Will and Testament, declaring that all of his property would be split between his surviving children. My question: if the Articles of the LLC’s do not specifically state that the holdings of the LLC’s will be passed on to his survivors or to whom he identifies in his Will, does the property go over to the state of Louisiana or is it passed on to his heirs without having to be stated as such? Al
Hi, Al. Please, don’t call me Mr. Donahue. Makes this 50-year old feel older. 🙂 In regards to your question, I’m going to give you a general answer that may not be 100% accurate because I am not licensed to practice law in Louisiana. This is important, because Louisiana isn’t based on English common-law like most of the other states, and therefore Louisiana’s laws around estates and land ownership tend to be a bit different from other states. Therefore, you really do want to consult with a properly licensed Louisiana attorney to get the best answer to your question. The general answer, that I would feel very confident about if you were talking about New Mexico or Illinois (because I’m licensed in those two states), as well as many other states in the US, is this: Neither the Articles nor the Operating Agreement of a LLC need to indicate that said LLC may be devised by Will. Therefore, a Will is a perfectly good instrument to indicate how to convey a deceased ownership interest in a LLC as devised within the Will. The caveat is this: Either the Articles or the Operating Agreement can have language that gives either the LLC or the other Members within a LLC the “Right of First Refusal” to acquire the deceased Member’s membership interest from the Estate. Again, please consult with a Louisiana attorney to verify my answer above applies in the great state of LA. Thank you, and take care! Larry.
Garrett says:I have a situation that I don’t think has been covered in previous questions. I am 10% owner of a two-member LLC in NY that has been in existence since 2014. Originally the LLC had three members, but one withdrew in 2016. During this time I have withdrawn very little money from the business, but have invested cash and sweat into it, and reported my share of the profits on my taxes each year. This was voluntary and at the time I felt a good long-term investment into what I thought would be my future full-time pursuit. I am now planning to withdraw as well, as my interests and life circumstances have changed, and my partner has settled into a “lifestyle business” mode for the company. The business has very little way of assets, and overall I expect to negotiate an agreement that leaves me at an overall loss, as in, I will have reported profits in excess of my actual withdrawals over time, including the final “buyout.” My question is, what are the tax implications of agreeing to a small (potentially nothing) buyout? Could I use it to offset earnings in the current year, or would I need to apply it to prior years?
Ian Alden says:Hello Garrett, Thanks for that question. I don’t believe we’ve covered what happens when a partner withdraws from the partnership (including an LLC taxed as a partnership) for less than they may be entitled. Before I answer your question, I would like to stress that you should speak to your accountant or CPA about the tax consequences that you specifically might face in this withdrawal. The most I can offer here is a high-level, slightly oversimplified explanation of partnership taxation that may or may not line up with your situation. To start, it’s important to understand how your tax basis in your partnership interest works. Every partner in a partnership has a tax basis in their partnership interest that amounts to that partner’s contributions of cash and property plus that partner’s allocated share of profits, minus that partner’s allocated share of losses and minus any distributions the partnership makes to that partner – whether those distributions take the form of cash or property. When a partner takes on an excess share of the partnership’s liabilities, their tax basis increases. If a partner is relieved of certain partnership liabilities, their tax basis may decrease or they may realize a taxable gain. From what you describe, it sounds like you have a decent tax basis because you have been allocated profits of the partnership (and reported your share of profits in your tax returns) but did not enjoy a distribution of cash or property from the partnership to offset those allocations. Now you’re faced with the prospect of walking away from your partnership for significantly less than your tax basis. In this situation, the IRS allows for a withdrawing partner to recognize an ordinary loss on their tax return provided the partner affirmatively withdraws from the partnership and abandons their partnership interest. This loss is recognizable in the year you withdraw from the partnership but can be used to offset your ordinary income – making it quite valuable if you have income from other sources you’d like to offset. That said, if you’re not withdrawing and abandoning your partnership interest altogether but, rather, are selling it back for less than your tax basis, you may instead be entitled to a capital loss. Capital losses can offset capital gains and up to $3,000 of ordinary income in any given year, but they can be carried forward into future years to offset future gains until they’ve been used up. Depending on how little the proposed buyout will be, you may find it more financially advantageous to simply walk away from the partnership and enjoy the ordinary loss. Again, your best course of action is to work with your accountant or CPA to figure out the tax consequences of your withdrawal, as the explanation I’ve given is very generalized and may or may not fully apply to your situation. Good luck to you, and thank you again for the question! – Ian
Thomas says:I was in business with partner 20 years. The business was in New York. I reached a point where I needed to dissolve partnership. My partner wanted to keep business going. We had an attorney who made out the letter of resignation from company. I paid all debts that were made by corporation, including a line of credit with a bank…thinking that was the end of my responsibility to this company. The lawyer we used assured me that there was nothing to worry about in the future. In the legal document it states that as of 11/7/2014 I wasn’t liable for any debt by that corporation going forward. A few days ago I received a letter from the bank stating that I owed $55,000. I went to the bank to see what this was for and was told that it was a line of credit. That line of credit was supposed to have been closed but was not. When I was part of the corporation I was the guarantor. I was shocked and sickened by this because my lawyer told me everything was settled and I shouldn’t worry about anything. What do I do now? I cannot sue my ex partner because the man has nothing. I would appreciate your help with this matter.
Larry Donahue says:Yikes! I’m sorry to hear this, Thomas. If I’m reading your comment correctly, you paid a line-of-credit (or LOC) off as part of your separation to the company, but when you did that, you didn’t make sure that LOC was then terminated or closed. Therefore, your former partner started reusing the LOC, and now the bank is going after you as the original guarantor of the LOC. Did I get that right? If so, there may be little you can do (other than go after your ex-partner). It depends on a number of issues. How did you pay off that LOC originally? Did you pay the bank directly, request they close the LOC and they failed to do so? If so, you may have a defense (or cause of action against the bank) — if you can prove it. What does your separation agreement stipulate? Is there something in your separation agreement you can use against the bank or your ex-partner? Did you pay your attorney, with the expectation they would ensure the LOC was closed? If so, then you may have a cause of action against your former attorney. I’m really grasping at straws here. You should hire another NY attorney to review everything, and see if they can figure something out. I’m sorry I cannot be of more help or support. Your predicament is exactly why you need to be careful when leaving a company. You want to make sure anything and everything with your name on it is properly closed, and if not, that you’re “in the loop” somehow to ensure your liabilities are being properly dealt with over time. Good luck to you. Larry.
Brian Williamson says:Hi larry, I have a llc and recently my partner parted from the company and took himself off the llc. We had originally both had a signed contract with another company that i am doing all of the work for and financing. My ex-partner is now trying to tell this company to not pay me.
And they are listening to him. Is this legal being that he is not part of the company anymore. And does him having been on the contract at the beginning before he left the company give him any control?
Hi, Brian. I apologize for the delay in responding to this. I managed to not see it come through. At any rate, there are some complex issues at stake here. First, can your partner legitimate take himself off. What does that mean and did he do it correctly? Second, what specifically is he telling your customer / client, and is he committing some sort of liable, misrepresentation, breach of contract or worse? The answers aren’t very clear, and it really depends on your Operating Agreement, contract with the client and any specific arrangement with your former partner. You really should have everything reviewed by a competent business attorney, so you can understand what your legal options are — if any. Larry.
Amit Patel says:Hi Larry, I am looking to dissolve my partnership in a small ice cream shop. My partner put up most of the money while I put up some however has not made all of his money back and therefore does not want to offer a payout of any kind. For the last 6 months, my family and I have worked basically for free as we focused the profits on paying off the debt owed. Is there any way I can get compensated for the work that has been done or at least get my initial investment back. My second concern is, my partner has decided to not pay the sales tax that was collected from customers. Is this something that could come back to me after I remove myself from the business. Is there something I can write in the contract that we created to end the partnership to avoid further repercussions?
Larry Donahue says:Hi, Amit. I’m sorry to hear about the problems you’re facing. At the end of the day, it sounds like both you and your partner are going to close this business down with a loss. It sounds like your partner put in cash, and you put in “sweat equity” (which means working for free or for a very low rate). When you close down or dissolve a company, you do it according to a formula that should be in your formation documents (i.e. Operating Agreement for a LLC or Bylaws for a Corporation). If you don’t have such documents, then you need to look at the law in whatever state you’re in, relating to the very specific type of entity you have (i.e. partnership, LLC, Corporation, etc). Typically, it requires closing the business, liquidating its assets and paying off the liabilities — ESPECIALLY TAXES. If there is anything that remains after that, then they can be distributed — PRO RATA (meaning, according to ownership) or ACCORDING TO THE CAPITAL ACCOUNTS (meaning, as dictated by the — to the shareholder’s equity on the balance sheet). Paying you a “fair wage” for your sweat equity rarely factors into such things. If you are negative, and the company owes liabilities, the partners may need to make additional capital contributions to pay off those liabilities before you officially dissolve the business. Depending on the liabilities and who you owe, bankruptcy may be required. Furthermore, not paying sales tax is a BIG PROBLEM, and would not advise you just dissolve the company without taking care of those taxes. Most states will go after individual owners for not collecting sales taxes properly, let alone collecting them and not paying them to the state. That is a very dangerous problem, and I don’t believe it’s dischargeable in bankruptcy in all circumstances. You should consult with a bankruptcy attorney or accountant who specializes in wind-downs. Good luck to you. Larry.
Mark says:Hello Larry,
I’m quit from my company on October 1 sending a letter of resignation to my partners and a communication to the Florida Business department (I saw my name is canceled from the company).
My decision to quit from the company was caused by misconducting by my business partners, making business and (bad) investments without involve me in the decisions (but not only). At this time they don’t want that I leave (because they don’t want pay me my 15% of shares). Is this not my right?
Could you please tell me what at this time I can “claim” from them and what they can claim from me? Also, could you please tell me: when a person try to involve another person in a company with the intention to sell part of shares, wich tipe of documents the seller is obligated by law to show at the buyer to demonstrate the real value of the company? is it a particular law that regulates this point? if the seller don’t provide “official” documents as tax return but only proof of money they invested in the company (with-out show where that money was spent for) and after the value of company is different and lower, who have responsibilities on it? at this time the company where I’m quit have staff and machinery deposited in a my home garage (I’m in rent and I pay the garage’s rent a part to maintain the storage for the company).
Before October 1 the company paid the rent for the garage. From October 1 my partners refused to pay the rent and I paid the rent for their staff (otherwise the landlord charge me). Can they came tomorrow to take their staff or I’ve to consider the staff “lost” because they don’t pay the rent?
If today I close the agreement for the garage (made by me and not at the name of the company), am I responsible for the staff and machinery inside?Do I have to communicate anything? Thank you so much!
Mark
Hi, Mark. You have a lot of questions here, and some of them require very complicated answers. I’ll give you quick answers, but I would strongly encourage you to hire a local, competent business attorney to give you the best answers — since the answers will depend on state law, as well as the “formation documents” for your company. First, can you just walk away from the company and demand compensation for your 15%? It depends on your formation documents, on how you can withdraw. If those documents don’t address it, then you need to look at state law. Unfortunately, I am NOT a FL attorney, so cannot comment whether withdrawal is permissible. You need to check with a FL attorney. Also, what is your 15% really worth? That can be dictated by your formation documents, or it can be “fair market value” (or FMV). If not dictated by the formation documents, you can certainly hire a valuation expert to find out (although they could be expensive). Second, there is no law that dictates what you have to show or not show in the sale of a business. However, you are required to be truthful. If you’re going to not disclose certain information, you could run the risk of a lawsuit by any potential acquirer if the lack of disclosure can be framed to be fraud or misrepresentation in any way. Finally, I don’t really know what to say about the garage and the equipment inside — I don’t really understand your question. I do think you need to be careful, however, because it sounds like you’re in possession of company assets and while they are in your “safekeeping,” you cannot just get rid of that stuff. You need to handle it properly, or you could be liable to the company for the loss of that equipment. I’m sorry I don’t have better answers. You really need to hire someone locally. Let me know if I can give you some names. Thank you. Larry.
Claudia says:Hi Larry,
In 2011 my husband and i went into business with another couple and opened a tax resolution company in Houston, TX. Prior to starting the company the other couple was having legal issues. Those legal issues had nothing to do with and were completely separate from the business we wanted to start. In August 2016 we sold our 50% to the other couple. We decided to part ways for many reasons. About a month after we sold the couple was arrested for mortgage fraud and was sent to and currently still in federal prison. As part of our separation agreement we had a clause included that we thought was going to prevent us from held responsible for any lawsuits. A few months ago an individual has filed a civil lawsuit against us. The individual became a client of the business 1 week before we sold. I responded to the initial documents filed with the court and submitted our separation agreement, and also included that we have no access to any of the clients information therefore we can verify any amount of monies the individual states he has paid nor did the client provide any receipts. nor do we access to the clients documents to even complete the work he signed up for the company to do for him. Even though I think we don’t owe this individual anything if I could of done the work he needed and make him happy then there would be no need for a lawsuit. he now wants the $4850 he says he paid, which we can not verify, plus another $5000, which he does not indicate on the court documents how he came to that amount. i wanted to file a continuance and then a motion to dismiss with prejudice, but i’m not sure what the best reason for a dismissal would be. what do you think? thanks,
claudia
Hi, Claudia. What I think, is you’re treading very dangerous ground responding to this lawsuit yourself, even if you think the dollar amount isn’t high enough to warrant hiring an attorney. I think you should call Kevin Michaels there in Houston. His number is (281) 496-9889, and he’s a great attorney. The problem is, just because you sold the company doesn’t necessarily mean you don’t have any liability. You signed a contract (i.e. the purchase agreement to sell the business) with the buyers, not the former client. Your purchase agreement gives you a right to seek indemnity from the buyers, but that indemnity appears to be worthless. You can certainly have culpability as against the former client, whether you want to believe it or not. Therefore, I don’t know if you have any grounds to seek a dismissal. It really depends on the nature of their complaint. If you don’t handle this properly, you could be in for a lot more than what they are seeking — and you will have precedent against you, and you better hope this client doesn’t talk to other clients and those other clients try to sue you too. I’ve even had a situation in the past, where fraudsters filed complaints, saying they were clients themselves (they weren’t) — our client didn’t have access to records to disprove the claims or disprove that these folks weren’t clients. This is definitely NOT a situation you want to find yourself in, so as it relates to justifying the expense of an attorney, I would strongly encourage you to look at it through the lens of the worst-case scenario, because it happens. I’ve been witness to it myself. Sorry to raise the alarm here, but I really want you to hire an attorney to fight this. Larry.
Lauren says:We have a Delaware LLC with 4 members. 2 of the members are wanting to resign due to issues with other members.
We have an operating agreement and it has a clause about Resignation. Here is the exact language…. “Termination of membership is caused by a Member resigning from membership of the Company, Resignation from employment of the Company, without and explicit resignation from membership in the Company, is not resignation from membership in the Company, and does not constitute termination. Resignation from membership in the Company is analogous to withdrawal from a partnership.” If we were to resign and give our shares to the Company and remaining members, will we be protected from remaining members coming after us legally after we resign? The LLC has not made any money and one member does not understand how that can be and is threatening to sue all members. We just want out and let them have the business 100%. We are not asking for a buyout for our shares…we just want away from them. Thank you!
Hi, Lauren. It’s difficult to give you an answer based on that language alone. If we assume there is NOTHING ELSE in the Operating Agreement governing this, then you need to look to Delaware Statute (specifically, Chapter 18, Limited Liability Company Act) for guidance, as it relates to resignation, distributions and liabilities of members. Unfortunately, I am not a Delaware licensed attorney, and therefore have to be careful what sort of legal advice I give you. You really should consult with a DE business attorney. What I can say, is Delaware Law tries to be fair, in that there is language relating to resigning members “. . . to receive, within a reasonable time after resignation, the fair value of such member’s limited liability company interest . . .” But, there is language that cuts both ways. There is language to prevent resignation unless provided by the Operating Agreement, and language that prevents folks from leaving the sinking ship, so to speak, and to be forced to participate in the winding down of the operations. There is quite a bit of nuance and pieces-of-the-puzzle that need to be factored in here, to give you a proper opinion. So please, find a good DE business lawyer, and have him or her look at your Operating Agreement and let you know what your options are. Good luck to you, and sorry I cannot provide more guidance. Larry.
clifford wong says:Hi Larry,
The member manager of our llc is retiring. Can he decide who is the next member manager of the llc?
Thanks,
Cliff
Hi, Clifford. The answer depends on a few factors: First, what does the Operating Agreement require, relating to the replacement of a member-manager? Second, what sort of ownership interest does your retiring member-manager have, as it relates to the Operating Agreement? Depending on the answer to my two questions, you’ll have your answer. For example, if your Operating Agreement says “Majority of the Vote of the Members” to replace member-managers, and your retiring member-manager owns 51% or more of the Membership Interest in your LLC, then your retiring member-manager can decide who the next member-manager is . . . Although, technically, he should still call a vote and at least have some semblance of following the corporate formalities as dictated in the Operating Agreement. Larry.
Danielle says:Hi Larry, We have a sticky situation. My husband formed a single entity Custom home building LLC in Alabama (March 2018) and one of his “friends” at the time helped him with the paperwork. He is a real estate agent and the only verbal agreement was that he would be the listing agent if the owner’s agreed. There was no Operating Agreement since it was a single member. His “friend” has since acted as a member stole and cashed an insurance check written to the company for which my husband had him arrested on 6 felony accounts (June 2018) My husband dissolved the LLC and has had to rebrand due to this event and individual. He has now served my husband with a civil suit claiming that he was a partner and my husband owes him 50% of whatever profits. The LLC never performed any work nor is there any projects or services that were contracted with the LLC he is claiming partnership in. I think this is a lot to digest but any advice is greatly appreciated.
Larry Donahue says:Yikes! Well, now there is a civil lawsuit filed, your husband has no choice but to hire a good business lawyer in the jurisdiction where the lawsuit was filed to defend himself. PLEASE DO NOT LET HIM RESPOND HIMSELF. A lawyer will help your husband file a proper answer, including counter-claims (which generally need to be submitted during your answer) such as theft of funds, etc. There really isn’t much I can offer you, in the way of advice, other than to hire a good lawyer ASAP. Don’t risk a default judgement by not submitting an answer on time. Good luck to you. Larry.
Larry says:Hi Larry, I invested $40K into a Company in exchange for 20% ownership. The Company turned out to be a failure, although I had no recourse to pursue claims of inducement to invest. I was able to get the existing members to agree to sign dissociation paperwork wherein I conveyed my 20% ownership in exchange for zero dollars as the Company was bankrupt. I am now in the process of filing taxes and would like to claim that $40K as a loss; however, the ‘problematic’ partner is insisting that he is entitled to claim a loss for my capital investment since I conveyed my ownership. Am I still entitled to claim my investment as a loss? Thanks Robert
Nick Mazzuca says:Hello Larry
I have a LLP that I inherited. A k-1 is issued yearly. How can I liqudate this investment.
Any advice would be appreciated.
Thanks
Nick
Hi, Nick. The quick answer is to hire a business attorney in whatever state your LLP is formed, send that attorney any formation paperwork you have, and that attorney will figure out how to get this accomplished for you. If you want to do this yourself, you need to first look at your formation documents and then follow the procedure or requirement in those documents. If the documents don’t exist, then you’re going to need to research state law to figure out the process (which will depend on the state the LLP is formed in). Usually, the process consists of following voting / announcements / procedures internally to dissolve the LLP, and then to issue Articles of Dissolution to whatever state it’s formed in, as well as following other requirements regarding taxes and announcements. It does depend on the nature of the LLP and its holdings, so it’s difficult for me to be more specific about this. Larry.
Christine says:Hi Larry, Great article! We have a new homebuilding company LLC in Texas that we share with 1 more partner. We want to start a new LLC on our own and leave the 1st LLC. Is there a way to roll our profit into the new llc for operating costs while avoiding taxes? Does the partner who keeps the original LLC benefit more than the one who starts a new LLC? Thank you for your time.
Larry Donahue says:Hi, Christine. You need to be very careful here. First, you have a “duty of loyalty” and “fiduciary duty” to the current LLC. If you start a competing company, and direct work, revenues or other business away from the current LLC to the new LLC, you’re going to give your remaining partner an opportunity to sue you guys. Second, do you know if you even have an option to “voluntarily withdraw” from the current company? This should be identified in your Operating Agreement. If it’s not listed in your Operating Agreement, you need to look to state law (and I’m not a TX lawyer, unfortunately, so you’ll need to talk to an attorney licensed in TX). Third, to directly answer your question regarding taxes, if I’m understanding it correctly, you’re trying to roll revenue into the new LLC while avoiding the tax obligation that goes along with that revenue? If that is your question, I hope you understand the obvious answer: no. At the end of the day, you’re only going to pull this off if (1) your remaining partner is willing to negotiate with you somehow, or (2) you have a legal basis (i.e. either in the Operating Agreement or in TX law). As it relates to the tax basis and revenues, I would recommend you consult with a CPA. Perhaps he or she can provide some better insight into shifting the tax burden associated with some of the revenue. Good luck. Larry.
Neso says:Hi Larry. My brother and I formed an LLC a few years ago as partners and we decided he could take over in full, and own 100%. Do I need to somehow include that on my taxes this year? I sold my share for a very small dollar amount.
Larry Donahue says:Hi, there. You should consult with a CPA or accountant, on the proper way to report this. Given you’ve sold your share “for a very small dollar amount,” you may have capital gains (or losses) to report or claim on your taxes. Also, you should receive a K-1 for the time period you were a partner. Your CPA will know how to handle this on your personal taxes. The only piece of real advice I can give you, is that you should make sure you have some sort of document evidencing the sale of your ownership interest to your brother. It should have the specific date and dollar amount, almost like a bill of sale. Larry.
Dee says:Hi Larry, I am a member of a 5 partner llc. I am the guarantor of the business credit card and the business is closed and one of the partners decided he will remove all of the equipment and hold it until two of the partners agrees to a buy out with him. I am one of the partners that he wants to force out. The equipment that he took was all bought on the credit card that I am the gatentor on. Dose he have the right to hold all the items I am having to still pay for or should the be returned to me.
Larry Donahue says:Hi, Dee. No, a partner is not entitled to take possession of the assets to the exclusion of the other partners. All partners are entitled to the same thing, and that is their share of the pro rate assets and liabilities of the business. This partner, expecting to be paid clearly doesn’t appreciate that he is also responsible for the debt of that credit card. I recommend hiring an attorney to issue a demand letter, and then take legal action as appropriate. Good luck to you. Larry.
Niecy says:Good morning Larry,
My husband and I are in a partnership, FL LLC with another couple. We each own equal share of the company. We all would like to part ways. We have no operational agreement. Before we became partners we each had the same company at the start. We decided to become partners because they had the professional licenses and we had business knowledge. They brought the license we brought the money. The business had to our knowledge never provided any services. Now we are separating. They want 50% of the start up money. They do not want anything for the license. The say they are entitled due to the work that was put in to start the company. This was never discussed nor did we buy into their company. It was seed money to pay employees until the company started to pay its bills. Our agreement was we give this a shot if it does not work we leave with what we brought. They keep the license and we get our money. We want to close the business they want to do a dissociation. Based on what has happen we would not cut all ties. Thanks for your response
Hi, there. You really should hire a local business attorney in FL to advise you. Was your money truly a capital contribution on the books? If so, then you split based on value of the company. An attorney needs to look at dates, circumstances, FL law, and make an opinion. There’s just not enough information here for me to weigh in on the capital contribution question. I will say, looking at it from a “we want 50% of whatever cash the business has” is the wrong way to look at it. You can dissolve the company, according to FL law, and unwind the company legally. That may mean you split whatever remains, and that may some of the cash that you put in. From a tax perspective, that cash would represent your capital contribution, and you would have a loss that you can use for tax purposes. Or, they can voluntarily disassociate (if permissible under FL law), and they would need to get paid their pro rate share of the business, which isn’t cash on hand but fair-market value. That is typically assets minus liabilities, then you go your separate ways. Without a partnership agreement of some time, it exposes your investment as a capital contribution and it becomes an asset of the business. Your former partners may well be entitled to some of it (given what I said above). Typically, in the future, you want some sort of agreement that spells out what happens to your cash, if the other partner wants to walk out or otherwise doesn’t meet your expectations or their promises. Larry.
Jen says:Hello Larry,
My friend is operating LLC in California with his partner. They started to have disagreements and his partner stopped working in the business. So my friend started to slowly close the business because he wants out. In the meantime his partner withdraw money from the business account which were saved for taxes and there is also a line of credit. On top of it my friend found out that his partner has a drug problem so he might try withdraw more money from the business. What should my friend do? And if he should hire a lawyer do you know smbd good in SoCal? Thx Jen
Hi, Jen. You hit the nail on the head. Your partner should hire a local lawyer in CA. Unfortunately, I don’t have any referrals for you in SoCal. We do have a good reference in Sacramento, but your friend should probably talk to someone closer just in case this turns into litigation. Good luck to you. Larry.
Reena Butler Stokes says:Hi Larry my husband recently died in January 2019 ,four weeks after his death ,1 business partner changed the name of the company had the other 2 sign off on the name change and formed a new llc company trying to take over the property . without my consent or knowledge as his executor of his estate, and the non operating business property has a loan and the loan is still under the original name and llc. what can i do to protect my self and kids from a shady business partner taking away everything my husband worked for?
Larry Donahue says:Hi, Reena. I’m very sorry for your loss. What you need to do, is hire a business lawyer in your local jurisdiction ASAP. Now, it may entirely probably that your husband’s business partners have the power and authority to do what they are doing, but either the Operating Agreement or state law (if no Operating Agreement) will dictate whether the Estate can continue to own the LLC, or whether some other mechanism takes over. USUALLY, but not always, there is a clause permitting the LLC itself (or the surviving Members) to purchase the deceased Member’s share of the LLC from the estate. This helps ensure LLC Member’s don’t have to do business with the family of the other Members, who they may or may not have a good relationship with. If that’s the case with you, then the existing Members can do whatever they want with the LLC. HOWEVER, they are responsible for the fair market value of your husband’s Membership at the time he became deceased, so moving property around isn’t going to change what the fair market value was at the time. But you should hire an attorney to help figure out what the exact status is of your husband’s former company, and to make sure the estate gets the proper value for your husband’s Membership interest. Good luck to you, and again, I’m sorry for your loss. Larry.
Jeff says:Hi Larry, my business partner is leaving our business due to his wife relocating for her job. We have been partners since 2007 and own a Landscaping business that is an LLC partnership in Virginia. I am trying to determine a fair way to buy him out. Besides splitting the actual property/equipment assests we are trying to determine a fair amount for the non tangibles, i.e customers because they are not bound by any contract and could stop service any time they wish. Is their a way like looking at past profits earned over the years to come up with a fair buyout? Thanks
administrator says:Hi, Jeff. Every business is different, and it’s really hard to give you some guidance on this. There are folks who do this, and they are called “valuation experts.” Typically, they can be somewhat expensive, depending on the business, but I suspect if you give a few a call, you’ll learn a thing or two. What I can say, is that’s quite common to use a value that relates to profits, and the remaining owner KEEPS THE ASSETS. The assets are critical to profits — so if you’re splitting the assets, your profit potential goes way down. Larry.
Greg says:If I had an LLC with no members listed but had a sole member operating agreement would my soon to be ex silent partner have any say in the business? Case in point is he committed fraud with my money that was to be used in another business venture so while I attempt to reclaim my money with a demand letter I was thinking I would just claim 100% of the profits from all future business since he was not on any of the OA’s.
Larry Donahue says:Hi, Greg. This is actually a difficult question to answer. It hinges on whether your “ex silent partner” was actually a member or not. Just because the Operating Agreement is a sole-member Operating Agreement and you guys didn’t get around to updating it, doesn’t necessarily mean your ex partner doesn’t have a claim as against the company. If he (or she) can prove she was a partner in everything but the OA, you may have a problem on your hands. You should talk to a local business attorney to review the specific facts and circumstances, to evaluate whether this is a good idea or not. Larry.
Logan Martin says:Larry, Remarkable work! My wife is a PA who owns a building and now a medical practice. Her 50% partner is a doctor. Their new partnership is an S Corp. My wife had a vacancy, so it seemed like a good spot for the new practice. The doctor’s credit was weak so my wife used the building as collateral for the credit line for build out, equip, etc. 6 months in, the doc told my wife it wasn’t working out and to leave, somehow convincing herself she could demand such a thing. My wife said no. Chaos ensued… for example, the doc went to the bank and transfered $150,000 from the line to her private account. without telling or documenting. My wife discovered this a month later. The doc’s attorney acted quixkly before embezzlement charges could be made and directed her to start making random business payments from the account. Repayment took 4 months. She and the office manager then secretly began working on opening a new business and signed a new lease. Within days of her resignation letter, she sent letters to all the patients (on departing company letterhead) asking them to follow her to her new practice. Thankfully all of the nurses and staff stayed.The bank got spooked, threatened to call the line. My wife was forced to sign an extension at a higher rate and lower limit without her partner’s signature, effectively releasing the doc from bank liability. Is my wife now stuck with the entire $440,000 debt, because she really didn’t have a choice due to timeframe and since the collateral was her building. Can these extreeme factors lead to a judge remove her partner’s shares without total disollution? -and hold her liable for her half of the debt minus assetts? Or perhaps make her liable for half of the line payments since she abandoned her own practice and cut the income production in half? Now my wife is scrambling to pay everyone and find docs who can help. Luckily, a friend doc starts this summer. Our lawyer is wise and patient, but seems overwhelmed. Phew!
Larry Donahue says:Hi, Logan. Wow! What a nightmare. We have two conference rooms, both with tissue paper on the tables, because of situations like these. They can be totally overwhelming and out of control. It sounds like you have a good lawyer working for you, so your best answer is going to come from that lawyer. I will say that it “sounds like” (I cannot say for sure, because it will greatly depend on the nature of the bylaws / buy-sell agreement, other agreements between your wife and her former partner), that your wife’s partner would have violated the duty of loyalty and fiduciary duty an owner owes to the partnership / corporation. This is governed by any / all agreements you have, so if they are silent on these things, then you have those duties that you can fall back on. Also, you cannot redirect company assets to your own enterprise. That just creates an opportunity for your wife to claim not only damage to the existing partnership, but a potential interest in their new practice. A partner cannot rack up a bunch of debt, and then leave, leaving all the debt to the remaining partner. There needs to be a proper accounting, plus factoring in the damage associated with the way the partner handled her departure, to figure out what that truly means from a financial perspective. Your existing attorney will know how to figure all of that out, and then it becomes (hopefully) a negotiation and failing that, a legal battle. Good luck. Larry.
Andrea says:I recently formed an LLC with a friend and have decided I want out of the partnership. Prior to forming the LLC, I had purchased a domain name and built a website using the brand name that I came up with. We later formed the LLC using the same brand name as the website. There is a section in our operating agreement that reads, “Where the remaining Members have purchased the interest of a dissociated Member, the purchase amount will be paid in full, but without interest, within 90 days of the date of withdrawal. The Company will retain the exclusive rights to use of the trade name and firm name and all related brand and model names of the Company.” Do I have to turn it over to the LLC or can I require them to pay me for it before turning it over?
Larry Donahue says:Hi, Andrea. It’s hard to give you a very precise answer with the facts you’ve given me, but in general, it sounds like the work you did and contributed is actually company property. If so, then there’s nothing to “turn over.” It’s the company’s and your withholding any assets (or access to accounts) represents a potential breach of the Operating Agreement. If that is true, then it’s best to not try to “take or withhold” company property, and instead make sure they pay you as required. This helps ensure you don’t have any “unclean hands,” and give them some potential claim (or defense) against you, if you need to go after them for lack of payment. Good luck to you. Larry.
Concerned says:Three questions: 1. In the event that a company can no longer make the buyout payments to the exiting partner, does the buyout/loan agreement (that has been in affect for 7 years) act as a lien on the company/assets? 2. Can/Should the exiting partner file for a lien? 3. Does the buyout/loan agreement take precedence over any other existing liens that the company has?
Larry Donahue says:Hi, there. It’s really hard to give you good answers to your questions, because they will greatly depend on the specific language in the buyout/loan agreement, as well as your state’s particular statutes / laws. My general answers are: (1) Can an “agreement” act as a lien on the company / assets? Answer: Not really. They are two separate things, in that the agreement would permit or authorize a lien or security interest on specific assets as collateral for the loan. There are exceptions, however, assuming this agreement could potentially fit within the guidelines of a secured transaction under the UCC. I am not a UCC expert, and I don’t have enough facts here to even guess if that is a possibility. Typically, however, a buyout agreement / promissory note would need to permit a lien on the assets, and then you would need to file or register that lien with the appropriate state agency (i.e. usually a secretary of state’s office for a UCC-1 filing, unless it’s real property, then you have a different lien filed usually at the county recorder’s office for a piece of real estate). (2) Can / should the exiting partner file for a lien? Answer: If the documents permit you to do so, absolutely. If you do not file for a lien (which puts the public at notice), then an “innocent third-party purchaser” can win in a dispute against you for the assets. (3) Does the “agreement” take precedence over any other existing liens? Answer: As I mentioned in #1, the “agreement” is not a lien in of itself. You must file a lien, if permitted by the agreement. So, the answer is “no”, the agreement doesn’t take precedence over anything. A lien might, but then only if it is filed first. So, dates matter here. This is a good question that really needs a good, local business lawyer. Please consult with one ASAP, so you have the best advice to handle this. Good luck! Larry.
Kacey Hanson says:Hello Larry, Can you sue an ex-business partner after you signed a buyout agreement? There was various issues that arose after the agreement was signed.
Larry Donahue says:Hi, Kasey. I don’t mean to sound crass, but it seems like anyone can so anyone for anything these days. With that said, here’s the real answer: To maintain a cause of action (i.e. file a legitimate lawsuit), as a general rule of thumb you need three things, (1) a duty, (2) a failure of a duty, and (3) damages. The buyout agreement (assuming properly executed with your ex-business partner) creates a duty. If he breached that agreement, we have a failure of a duty. The big question is, do you have (provable) damages? Note that courts detest “speculative” damages, and if they are hard to prove think “expensive to prove.” Assuming you have all three things above, you should be able to sue. Of course, I recommend you talk to a good, local business attorney to review the document, talk to you about your circumstances and give you a more specific and informed opinion. Good luck to you. Larry.
Joe says:Hi, We have a small business and with 7 partnership but unfortunately I want to be out of this business what is the proper way of exiting? Thanks
Joe
Hi, Joe. Please review the article. I think it does a pretty good job of highlighting the issues. If you’d rather not figure it out yourself, my advice would be to hire a local business lawyer (wherever you’re located), and have them look at your formation documents and figure out what your options are. Good luck to you. Larry.
JB says:Hello Larry, I have a situation that I am looking for advice on. I formed a Partnership LLC in Oklahoma City, OK at the end of last year with my wife. We did not have any kind of operational agreements. The business never actually did anything, we made about $25.00 total for the business and the taxes were filed this year for it. The thing is that my wife left in January and I have no idea where she is. I know that she is pregnant with another guys baby which is preventing me from getting a divorce because a paternity test is required by law. After repeated attempts, neither I nor my attorney can find out where she is living, much less get her to come back to OKC in order to go to court or anything else. The LLC has not been used at all since last year and has had no sales or purchases, no assets or investments, and nothing else attached to it in any way. I am having to file sales taxes every month by the 20th for a business that is not used, plus the cost of doing yearly taxes for an entity that is dead. So, my questions are as follows: 1. Can I dissolve or remove myself from the LLC without her being present? 2. If so, how would I even begin going about that without a lawyer, because I cannot afford that expense at this time? I’m sure there are more questions, but I can’t think of them all right now. I look forward to your response, thank you and have a great day.
Larry Donahue says:Hi, JB. Good grief. What a nightmare you’re going through! I’m so sorry to hear it. Unfortunately, you need to consult with a OK business lawyer to give you the answers you need. I am not licensed in OK, and I don’t have access to any attorneys licensed in OK. I’m really sorry. With that said, if I were you and located in New Mexico, I would simply go to the Secretary of State’s website, download an Articles of Dissolution template, and do my best to dissolve the LLC myself. Technically, I wouldn’t be permitted to do it and it would be a violation of the statute. My dissolving the LLC could give my wayward wife a cause of action against me. However, just how much in damages can she seek, when the company only made $25? I’m not telling you to do that. I cannot, because I’m not a licensed attorney in OK and I’m not familiar with the specific legal issues surrounding this in OK. I’m just saying what I would do, if this was a NM issue. Good luck to you. Larry.
JB says:Thank you so much for your reply. I will do more research on it and see what I can find. I do see where you are coming from in your reply, and as you stated she doesn’t really have anything to seek in damages. That may be the route that I end up trying to go. Thank you again for your reply. Have a wonderful day! JB
Vessy says:Hello Larry,
I just bought out my husband’s partner in a Real Estate brokerage. It wasn’t a pretty separation and the ex-partner is very bitter. Going through the books I have come to find out that he has made lots of spendings and receipts are missing. What is the best way to demand the receipts from him and do I have a right to do so. Getting ready for the tax year without receipts would be a nightmare. I am not sure how to approach that. Thank you very much!
Hi, Vessy. Thank you for your questions. Yes, you have a “right to ask” for receipts, although he may not have a “requirement” to provide them to you. The trick that may get the ex-partner to provide the receipts (assuming he even has them), may hinge on the purchase price of his ownership. If that depended upon his affirmative statements regarding the expense or tax position of the company that cannot be maintained, you may be able to have a cause of action against him related to your damages for any breach of the representations and warranties of the purchase agreement between you and him. Note that I just made a LOT of assumptions in the above paragraph. Specifically, (1) that there is some sort of representation and warranty, (2) in a purchase agreement, (3) that relates to expense or tax position of his membership interest, and (4) it’s of a significant enough value to warrant a potential lawsuit (i.e. cause of action). Typically, what you really want, is to make receipts, QuickBooks files, etc, part of the package that are to be turned over and delivered to you, once you take possession of the business or partnership. Otherwise, it tends to be very difficult to enforce and obtain these things. Often, you’ll end up spending more on lawyers than any tax advantage you were hoping to gain. Larry.
Joshua Chappell says:Hi Larry my wife has a 20% interest in a Sonic as the operating partner. She wants to dissolve this and no one can tell us where or how to come up with what her 20% is worth. They made an offer of around $1800 for her 20%. Lots of things do not make since on the P and L sheet from her store to other stores especially since her store has a huge loan payment they used to purchase it. So how can we find out the value of her part and who could we speak to about the P and L sheet to find out where she is getting messed around? Thanks.
Larry Donahue says:HI, Joshua. Sounds like you need to talk to (1) a forensic accountant, and (2) a valuation expert. Unfortunately, they both can be costly, but the only way to get an accurate assessment of (1) the P&L, and (2) the actual value of the business. I will say, one method of calculating valuation of a company is assets minus liabilities, although that doesn’t convey an accurate picture for some companies (i.e. think up-and-coming companies, companies that are growing quickly, or companies that have lots of cashflow or profits that may have value above-and-beyond the assets minus liabilities). If you have a large note on the business, that could act as a significant counterweight to any assets, decreasing its value. A competent business attorney will have access or know such resources, and can help you with this. However, when I’ve been involved in fights like this, it’s not unusual for the client to spend $20k to $50k in professional fees (i.e. lawyer, forensic accountant and valuation expert), sometimes even more than that. You’ll have to weigh the cost of “fighting” or at least verifying with what you think the business might actually be worth. Good luck to you. Larry. Larry.
Pasqual says:Hello Larry,
I have a quick question, I recently had a member of my LLC resign, leaving me as the only member. It was mutual and things went smoothly. I live in Texas I was just curious if you knew who I would need to speak to to officially remove him from the LLC.
Hi, Pasqual. I would recommend you hire a local business attorney to make sure you’ve done everything you need to. Things that come to my mind (and I am NOT a TX lawyer) are: Separation Agreement, revising the Articles, revising your Operating Agreement, and changing the “Responsible Party” for the FEIN. A TX business lawyer can also let you know if there are local / state issues you need to take care of. Good luck! Larry.
Jason says:Hey – starting my exit from a long-standing LLC. We have worked towards an agreed $ amount, but as i am leaving, i am not sure about the tax liability for me and what i can do to reduce it as much as possible.
Do you have any information regarding the best way to exit tax-wise, as i am the partner leaving.
Many thanks,
Jason
Hi, Jason. I would strongly recommend you consult with a CPA before finalizing your exit. What should happen, is either your partner (or the LLC itself) would acquire your Membership Interest, and if that’s appreciated, it should (hopefully) be classified as a long-term capital gain (which will save you big-time on income taxes). You have to make sure things are classified properly, however, on the separation agreement (or purchase agreement or whatever you’re calling it). Larry.
Jason G Kilby says: Thank you for the advice, Larry! Much appreciated. Keri says:I have an LLC with my mom and my sister. The business has not been profitable and my mom and sister just want to leave the LLC. I started the business and I want to keep it. My mom and sister are fine with me keeping it, they just don’t want to be in the business anymore. What would I need to do in this circumstance?
Larry Donahue says:Those are the big issues, but it doesn’t hurt to consult with your CPA and/or a local business attorney.
Good luck to you! Larry.
teen says:The Division of Corporations is required by statute to reject for use any corporate, limited partnership, or limited liability company name that is not “distinguishable” from existing names on file. The only avenue to determine whether a name is available for a corporation, limited partnership or limited liability company is to make a name availability inquiry. The Corporation and Business Entity Database online search is intended for status inquiries of entities already on file with the Department of State. Customers are cautioned to avoid interpreting database search information as an indication that a name is or is not available for use.
Angela says:First of all thank you for this blog. Very interesting.
My question is this….when my last parent died, my 8 siblings and I inherited the family farm. We formed an LLC with the farm as the main asset and we all own an equal 11.11%. Each year we get a K-1. We usually don’t have much income. After 15 years, some of us are ready to leave the LLC and want to be paid for the value of the farm land. What is the best way to transfer our shares to the remaining LLC members or a member at a purchase price? Also, since this property was an inheritance (all names are on the deed), how we can best make this transfer with the lowest amount of tax liability?
Hi, Angela. Thank you for your question. I know the property doesn’t have much revenue, but you really need a local business lawyer and/or CPA to help you with this. First, the land should be owned by the LLC, not you folks personally. Currently, the land and the LLC don’t run together, creating the risk of land being distributed on ways you may not intend and that don’t follow the LLC. Second, it’s not hard to depart from the LLC, but you really need to follow the requirements of the Operating Agreement. This should spell out how a Member can leave, whether voluntary or not, and the terms of sales to the LLC itself or other Members. The Operating Agreement should have all the instructions on how to do this, and if it doesn’t, then you need a local lawyer to help you through the process (i.e. how to follow State law). Third, you want to minimize taxes, but it’s a bit hard to give you advice with so many variables with what I know (and don’t know). I’m sorry, but I just cannot give you any sound advice at this point, without knowing a LOT more. A CPA can help, after you’ve figured out what options are available for exiting the LLC (and getting compensated for your share of the land). Good luck to you. Larry.
Joseph says:I created a partnership LLC with my friend in California, our license was approved in December of 2019. I have come to the conclusion that my partner is lazy and simply using me as a way to leach money with minimal effort. I want to either 1) leave the LLC and create another separate from my partner or 2) ask him to leave the LLC and forfeit his ownership and interest in the company. Ideally I want to go with option 2. We have no loans, mortgage, etc. and all of the money invested into the company is out of my own pocket, we have no revenue yet. I have not been able to get him to sign an Operating Agreement. What steps should I take to get him to leave the company? If he refuses, what steps should I take to leave the company? Will I still be held liable for taxes if I leave? Can this come around to bite me? Any advice on the process or what to research is appreciated. I have thought about dissolving the LLC but I would still be responsible to pay Franchise Taxes regardless, so it would be redundant to pay the tax or then pay it again by opening another LLC.
Larry Donahue says:Hi, Joseph. Thank you for your question. I know you want a process to follow, but it’s very difficult to give without knowing a lot more facts. My recommendation is you hire a CA business lawyer to talk with you, learn the facts and circumstances, and give you some options to navigate this. The reason I say that, is if you don’t do it right, your partner could have a cause of action against you and/or the new company down the road, when it becomes more valuable and successful. What you want to do, is chart a course that puts your friend firmly in the past without the ability to come back after you, or given he’s your friend and you don’t think he’d do that to you, then what about his family or beneficiaries should something happen to him. There are really two paths. First path is to get him to agree this isn’t working out, and get him to sign a separation / dissolution agreement. Then, this would free you up to do whatever you want later. The document needs to be well-crafted, however, so he doesn’t later claim you tricked or misrepresented something, with him attempting to otherwise nullify this separation agreement. The second path is to do it from a legal perspective, regardless of how your friend feels about that. Of course, this must be done carefully, after a very careful review of the facts and circumstances, perhaps a review of the OA you tried to get him to sign (and an understanding of the negotiations between the two of you or otherwise why he hasn’t been willing to sign the OA). Again, both paths really require a good CA business attorney to navigate these paths for you. I know it’s probably more than you want to spend, but think of it from a perspective of saving you tens-of-thousands fighting off something in the future when your second attempt is thriving and successful. Good luck to you. Larry.
Tucker Hess says:Hi Larry, I am a member of a 3 person LLC with my brother and his now fiance. The business is an e-commerce store and has grown very quickly over 3 years, from $300k to $500k to $700k annual revenue. We have begun to disagree about many visions for the company and they are basically trying to dissociate me from the business. We never had a written partnership agreement or an operating agreement from the beginning, so we are in the process of trying to draft one up. This all began last month when they handed me a document listing their grievances with me and said they didn’t want to be partners anymore. After learning what they can and can’t do, I guess we are coming to making the operating agreement. However, because of the fact of our matter, they weren’t allowed to draw a salary without all 3 of our consent. So we have always paid ourselves the same. Now since I moved to be closer to them, I moved all inventory from my house to theirs. They have drafted up 3 separate contracts, written by themselves and signed by themselves, in an effort to bypass the salary situation. These contracts are for a “Lease Agreement” where they took out $3,000 this month as a “rent payment” for the business to operate at their house. They also go live on Facebook, so they are taking $200 per live show they do (about $2,000 a month). They are also taking a compensation of $1 for every order they ship (which had been in place already), but raising it to $2 per order. Are these contracts enforceable if it were to go to court? Or would this be considered Self Dealing? They only drafted and signed these contracts because it benefited them and would help bypass the inability to draw a salary. Again, it is a 3 person LLC. Thanks!
Larry Donahue says:Hi, Tucker. Sorry to hear about all of this. I feel like my advice recently for a lot of the questions I’m receiving are, “hire a local business attorney,” and I’m sorry to say that’s not changing today for your question. At the end of the day, the LLC can act on behalf of the Members. The LLC can certainly enter into financial conflicts if the Members permit it, and the LLC can certainly “self deal” with Members of the LLC, if permitted by the Members of the LLC. The question is, is the LLC properly authorizing this behavior? The reason I say you need to hire a local business attorney, is for several reasons. First, you said you have no Operating Agreement. This means you need to look to state law on how to manage the LLC. Different states have different rules around financial conflicts, distributions and more. Second, it sounds like you’re a “minority interest owner” although you didn’t quite say so. If that’s true, then you could have some protections as a minority owner — and a good attorney can help you figure out what those might be, given your state and the overall factual circumstances you’re dealing with. Third, it sounds like this has been going on for some time, and it begs the question, “How has your LLC been taxed?” If it’s been taxed under Subchapter S, then the distributions need to be pro rata according to ownership. Some of the payments your partners are making to themselves sound like they may be able to be classified as distributions versus payroll. If all of this is true (and I’m not a CPA — so you need to talk to a CPA, too, aside from a good business attorney), you may have a cause of action against the other Members or the LLC itself for jeopardizing the S-Corp status or not paying you your fair share of the distributions. As I hope I’ve conveyed above, the issues here are complex and it’s not clear fro the facts you’ve presented that your partners are violating any statutory obligations. You need a good attorney to help you do that deep dive. Good luck to you. Larry.
Garret says:Hello, I’m in a 3 person partnership/incorporation. We all own 33.3% of the shares equally. I am leaving in the form of a contested departure unfortunately, and I am curious as to what I can legally leave with. I’d like to bite the bullet and take my leave as peaceful as possible, however, I don’t want to relinquish my shares/rights without being properly compensated. One of my partners is in possession of the articles of incorporation as well as the operating agreement. I have asked several times for these documents however they are still being withheld from me. I believe my partner is in the process of drafting a separation agreement, however if I’m not mistaken I believe I need to be involved in that process in order for it to hold any form of validity. I’m not sure if he expects me to just sign whatever he sends but that is not going to be the case. If there’s money in the bank account, and I decide to transfer that money to a personal account during the interim to avoid losing everything, can I get in legal trouble for doing so? Also I’m curious as to how I evaluate my shares as far as what I can sell them to my former partners for. I do not trust my partners, and one of them knows my Social Security number and has a lot of connections and knows a lot of loopholes. How can I protect myself and get what I deserve without making things worse?
Larry Donahue says:Hi, Garret. The quick answer to your two questions are, “Yes, you can give your (soon-to-be-ex) partners a cause of action against you, by you stealing assets such as cash from a company bank account,” and “You can hire a business attorney to consult with, so that he or she can properly advise you on your options, the risks and relative costs, and help you exit.” I could literally write a book given what you’re going through, but that’s not quite appropriate for these comments. I will say a few things, however. First, you certainly do not have to accept whatever they try to give you in the form of a separation agreement. I would strongly recommend you have an attorney review it. With that said, it sounds like you don’t have the correct picture on valuation. That’s probably something you need to figure out, although there could be some language in your formation documents that controls — for example, there could be a formula, a process or procedure, or at least some definition on how the cost of a valuation is shared amongst the company and/or the partners. You definitely need a copy of the Articles and Operating Agreement, and they need to release those. If they are unwilling to do so, you have some options. First, you can refer to state law and run on the assumption there is no Operating Agreement — until they cough-up the real docs to prove otherwise. Second, you can simply presume whatever is most favorable to you, again until they cough-up the real docs to prove otherwise. Litigation, of course, is always an option and these documents would certainly be discoverable, although litigation is a costly avenue that should be avoided if possible. Good luck to you. Larry.
Geoffrey says:Hello, I formed an LLC with two friends.. in the beginning we split evenly, eventually we dropped a member to 10% and two of us bumped to 45%.. later the third member left, leaving myself and the other 45% to split evenly at 50/50. Towards the end of last year, things took a downward spiral and I ended up leaving. The company didn’t make a lot of money, so I am not too worried. My total income from Jan-aug was probably about 3000-3500 with the business making around $17k at that point. My partner was doing some things I didn’t like, such as moving thousands of dollars through the business account… I am not sure how that would impact company revenue, but I was wondering what the implications on my taxes would be? Do I just need to report on my income and not worry about the rest?
Ian Alden says:Hello, Geoffrey, Thank you for that question. I’m sorry you’re in this predicament. As a general rule, you, as a member of an LLC taxed as a partnership, are only taxed on your respective share of the LLC’s net business income — that is to say, the LLC’s income less applicable deductions. Your partner moving money through the business account is problematic for a number of reasons. First, it’s a classic example of commingling personal and business assets that can expose the LLC’s owners to personal liability for any judgment against the LLC through a process known as “piercing the corporate veil”. Second, it’s a concerning indication that the LLC’s bank accounts are possibly being used to conceal income by masking the money as business income for funds tracing purposes — a process often referred to as “money laundering”. Such activities violate numerous federal statutes and could expose the LLC and one or more of its owners to civil or criminal penalties. With regard to what you need to report for tax purposes, the LLC should complete and file a Form 1065 (U.S. Return of Partnership Income) every year for the previous year’s activities and issue Forms K-1 to each LLC member listing their respective share of the partnership income for tax purposes. You’d typically end up reporting the amount on your K-1 for your personal income taxes. I strongly recommend consulting with a good accountant to ensure that the LLC is keeping up with its tax preparation and filing obligations. Thank you again for your question! Best regards, Ian M. Alden
Geoffrey says: Thanks for the response, Ian. So even though I separated in August I will still need to file a K-1? Ian Alden says:Good morning, The LLC will need to file a Form 1065 for the part of the tax year that you were a partner/member. The LLC will then issue you a Schedule K-1 which details the LLC’s income (for the part year you were still a member) that was allocated to you and will need to be reported on your personal income tax return. All the best, Ian M. Alden
Candi says:Question.. A business.. 3 parts… building, land 1 LLC, Assests 1 LLC and then the trademark name 1 LLC. the trademark is in my name only. the other 2 I thought I had part of and recently found out I DO NOT. I am cutting ties the other 2 LLC owners. Can I take MY Trade Name with me? It is in my name only but with out it the business is nothing.. I want to take it.
Larry Donahue says:Hi, Candi. It’s impossible to answer that question with the information provided. It really depends on any pre-existing agreements between you and/or the partners and/or those other LLC’s, as well as the Operating Agreement with the trademark name LLC. Finally, if the trademark / trade name is an asset of the LLC and/or could create a likelihood of confusion with any products / services of the LLC, you could have an issue there. There is another potential issue, however. You said “Trade Name”, but said “trademark name 1 LLC”. Not sure if this means you have a valid TM with the USPTO in your name, versus the LLC’s name. There could be some delicate ownership issues with the USPTO, if things weren’t setup properly. Therefore, I would strongly recommend you hire an appropriately qualified attorney to review everything and weigh-in on the possibilities, before you do anything. Good luck. Larry.
Sue says:Hi Larry, My husband and I started a real estate LLC a couple years ago. We’ve since divorced but maintained the business partnership. During the course of having the business… I’ve done everything from handling the books, collecting the rents, paying all the bills… etc etc etc… While all he’s done is simply respond to text messages and signing off on things. A few months ago, we had a verbal discussion of transferring everything needed to run the business to him and have a discussion about buying me out… as I just can’t keep being the only person doing all the work. Since I’ve left everything to him… there’s evidence of him spending the business funds on personal use and ATM withdraws… payments and bills not being made… payments being rejected because of insufficient funds… and not collecting any payments….. none of which happened a single time while I was maintaining everything. All I want at this point is give my resignation and just be done with all of this… as he will not communicate with me at all regarding what he’s doing and what’s happening… and I’m afraid that all of his terrible decision making and management of the business is going to drag me down with him… I’ve literally exhausted myself as much as I possibly can in trying to get answers and reasons for the insufficient business account and unpaid bills…. I’m at a loss as to what I can legally do at this point aside from just hiring a business attorney… but even then I don’t know what all I will need to keep myself in good standing.
Larry Donahue says:Hi, Sue. I’m sorry for your predicament, although I’m sure it won’t come as a surprise to you to hear this is a common problem. There are a few different possibilities here, depending on how different pieces fit together. First, your divorce decree / marital settlement. Second, the Operating Agreement, if it exists. And third, the statutes / laws of your state, to “gap fill” anything not covered in the first two items I mentioned. These three things will dictate what you can and cannot do with respect to the LLC, and how you navigate an effective departure. The other factor to this, is what has your personal name on things (i.e. personal guarantees, mortgages, etc) and what you may need to do to remove your name. Typically, lien holders (i.e. mortgage companies, etc) aren’t going to take your name off any personal guarantees. It’s very rare for a lien holder to be willing to do this. What you may end up having to do, is sell some of the assets or force your ex to refinance, if possible. If he’s not willing to play ball / negotiate, then you may need to seek judicial intervention. I caution you about this, and you should only view judicial intervention as a last resort. It’s expensive, uncertain and takes a long time. Your ex can do a lot of damage between now and then. How you should “read between the lines” in this last paragraph, is that it may be worth negotiating a significant sum in his favor, as an incentive to get him to act versus having to take him to court. Good luck to you. Larry.
Eduardo Annesi says:Hi Larry! we are 3 partners – we developed a mobile app – we spent a long time to get it ready (+ 1 year) and cost us +- $ 7k. Two months after the app was ready (along with the COVID epidemic) one of the partners told us that he no longer wanted to participate in the company, forcing us to close the company, which we don’t want. He owes money to the company, he is not paying his share of the debts, he does not accept any agreement, he held the company’s Ipads not allowing us to go back to work. We’ve proposed to purchase his share and he did not accept it because one of the clauses of the contract is the non-competition in the same region where we operate. We heard from a third party that he copied the app. we developed and he wants to act alone. He is constantly threatening us that he will send a letter to the state of Florida requesting his disconnection from the company – we do not know what to do or our rights – it is a LLC and we do not have any prior agreement like buy/sell or others, could you give us some directions about what to do?
Larry Donahue says:Hi, Edwardo. I’m sorry to hear about your predicament. I just hate to hear about bad-actors like this . . . who operate in bad faith. You really need to hire a FL business attorney, who can tell you what state law is with respect to the LLC. The question is: Who owns the IP (copyrights) of the software? The LLC or you guys individually? Either way, it doesn’t sound like your one partner has the right to take the app and use it on his own (unless he’s the only developer, and then only if you guys individually own the IP). So, hire a lawyer and he or she will let you know what your options are, given the factual circumstances. Good luck to you. Larry.
Cosmo Solano says:Hi Larry,
We have a small two partner LLC in Colorado. the business is a live performance theater, and of course we’re closed due to the Corona Virus. I am the managing partner, and my partner (former) wants out of it, and sent me a letter removing himself, although his leaving is not on friendly terms, I am not contesting.
I have since dissolved the company. but once this corona virus goes away, I want to re-open. We have a registered LLC name, (The Prestige Theater LLC) but have been operating under a “dba” (Cosmo’s Theater) since right after opening.
Does my former partner have any “intellectual” rights that might keep me from operating the new business under the “DBA”?
Hi, Cosmo. What a great question! First, let me disclose to you that I am NOT licensed in CO, so you should double-check this response with a properly licensed business attorney in CO. Second, it sounds like your partner resigned (assuming he legally resigned, and it was “official”), and I assume the LLC owned any/all intellectual property rights (including the name). Note the assumption: This could be false under a number of scenarios, but for the sake of a quick and easy answer, we’ll assume the LLC owned the IP. Now, assuming your LLC was properly and legally dissolved, then you either (1) assigned all the IP legally to some other entity, or (2) didn’t assign any of the IP and let the IP lapse. I’m making another assumption here, and that is you didn’t file “Cosmo’s Theatre” as a trademark that still exists. If that’s a false assumption, and a TM registration exists, then that adds additional complexity to how this is handled. But, let’s assume no TM exists. Let’s also assume you did not assign any/all of the IP to another entity upon dissolution. You dissolved the LLC, which strongly implies there are no more IP rights related to the name or DBA of the business. if that’s true, then anyone can use that name again, and you would be strongly encouraged to start using it first before anyone else, or to get a state-based or federal-based trademark in an attempt to define TM rights and associate them with the new operating entity of the theatre. State is easier. Larry.
Robert_CT says:Hi Larry – Thanks for the post and answering everyone’s questions. Its a great service to the public. In a similar situation to many here, in the midst of the sale/buy-out of 50% partnership interest in an LLC. We are just trying to settle on payment structure ahead of a to-be-determined binding independent valuation. What are standard terms for a small business (Valuation is expected to be $800k to $1.3M), over what period of time? As its a “business divorce” the selling partner wants the majority 50%-75% upfront and no longer than 12 months to complete payments. The seller is seeking under 15% upfront and payments over 3 years. What is typical / most common? What is standard? Thank you so so much.
Larry Donahue says:Hi, Robert. There really isn’t much of a “standard” here. I will say, the big issue is making sure the company isn’t cash-poor trying to pay out the departing owner. So, it really depends on the cashflow of the company. We’ve done deals where the buyout is over 3 months, and we’ve done deals where the buyout is over 10 years. I would say 3-years hits the middle of the bell curve. There’s usually interest, and sometimes a lien on assets (i.e. if the business doesn’t pay, the departing owner has some recourse against assets). Another issue to consider: We’ve seen where the departing owner starts a competing business, or otherwise attempts to solicit / siphon-off business or customers, from the company they left. This will erode cashflow for the company, and I strongly recommend tying the promissory note to compliance with the separation agreement, so that if the departing owner breaches the separation agreement or otherwise competes, disparages or otherwise negatively impacts the cashflow generation capability of the company, that departing owner loses their ability to collect on the promissory note (i.e. the company shouldn’t have to continue to pay under such circumstances). Good luck to you. Larry.
Mashi Nguyen says:Hi Larry, I owned 19.5% of a restaurant in CA with my partner, we registered as an S-corp. Through out 3 years our visions have been conflicted and since she’s the majority owner, she used that to make many bad decisions for our business, leaving us in a lot of credit, taxes, and personal debts and liabilities. I wanted out many times but her excuses were always that she has no money to do so, she can buy me out for 0 dollars (I’ve put in 200k+, both as my 19.5% shares and personal loans to the company since she refuses to reduce her share). Recently she has a change of hearts and want to buy me out for $50k, I know it’s not the best deal but it’s been 3 years and every month with her running, we’re bleeding out $15k+ in losses so I’d rather cut the loss. My only demand is that I want a clean slate, which means all prior obligations and liabilities to be removed from me, dissolving all current debts from my responsibilities (which she agrees), basically I walk out of there debt free and nothing relating to that business can come back and trouble me. What kind of document other the Separation Document should we have, and how do we deal with any debts the company currently cannot take care of right away which my name can’t be removed from at the moment. Thank you!
Larry Donahue says:Hi, Mashi. A Separation Agreement is a start, but you do need to deal with those other debts / liabilities that have your name in it. The article above touches on the issues, but you need to treat is as a debt on behalf of the company, and look for ways to protect yourself. For example, getting a security interest agreement along with the appropriate “security” from the business and/or her personally will help. You should also demand (in writing) that (1) such debts are given priority by the business and (2) refinanced if possible and/or within a certain period of time. You also want to think about “what could go wrong?” For instance, the debt not getting paid. Make sure you receive a notice (from the lending institution) if they are not getting paid, so you can step in and pay the debts so as to not default. Good luck to you. Larry.
Ron says:Hi Larry,
Great site!
We are in California and have a S Corp with 4 partners in our construction company. One wants to leave and two of us we would like to get him out asap. This came up in June of 2020 and our CPA is telling us to wait till the need of December so the schedule K’s match. This doesn’t make sense to me since partnerships dissolve at different times all year long.
Is there a benefit to waiting and doing it this way? Or should we proceed and expedite asap?
Hi, Ron. That’s really a great question. I think your CPA is right, in that it will certainly simplify the K-1’s and taxes. BUT, you’re absolutely right, in that this happens all the time and your CPA can certainly issue you TWO K-1’s or the appropriately adjusted K-1 reflecting the change in ownership in a tax year. With that said, I recommend doing it NOW because it’s really hard to get folks to leave, so if you have him agreeing to leave now — you really need to strike that iron while it’s hot. Otherwise, the partner you want out may change his mind, then what are you going to do? So, I think it’s critical to move, if you have a window of opportunity, even though it does complicate the tax/K-1 work. Good luck. Larry.
Macey says:Hi Larry, thank you for this blog post and taking the time to answer people. I scrolled through all the comments and couldn’t find a direct answer, so I sincerely appreciate you taking the time to read my comment. The TL;DR of my situation is that I am a 50/50 owner of an S corp in AZ. I desperately want to leave as my partner is a narcissist and an overall awful person. I wish I saw this before going in… Anyway, I have no idea what documents I need to exit this partnership and not be liable for anything. We have no bylaws regarding a departure and we both agree to him buying my shares out for $1,000. How do I make sure all the correct documents are made and signed right now? I don’t want to forget anything and be done with him now and forever. I’ve looked online for everything but cannot find any direct documents/help and need the papers as soon as possible so he can stop trying to get more out of me. Please let me know what documents you believe I should be sending to him to fully exit. THANK YOU
Larry Donahue says:Hi, Macey. I apologize for the delay in responding to this — I know you’re looking for a quick answer. Unfortunately, I check the comments perhaps once a month. I should do it more frequently, but we’re getting a lot busier with client issues given the pandemic. At any rate, it sounds like you two are in a “meeting of the minds” related to your departure, which is great. It doesn’t really matter what your bylaws or other documents say, provided you both sign a separation agreement that has the right language in it. That separation agreement will protect you from any further problems and liabilities with the company, although it really cannot protect you from earlier / previous liabilities, especially those that you personally agreed to (i.e. think leases, loans, etc, where you signed a personal guarantee). Your only protection against such debts / obligations is to get him to pay them off now, and if he cannot do that, then put in place some sort of promissory note. The best are “secured” against business and/or personal assets. But, you need additional protections, too, such as the ability to step in and pay off those obligations if he doesn’t or cannot, as well as notice. Note that the “separation agreement” is only as strong as your soon-to-be-partner’s ability to adhere to it. Finally, you should make sure the articles are amended, as well as you should update the IRS if you’re listed as the “responsible party.” You really should hire an AZ-business attorney to help you with this, and make sure you’re not missing anything. Good luck to you. Larry.
Arthyr says:Hello, I am having trouble finding information about obligations of managing members in an LLC. Essentially myself and another partner are managing members and there are silent partners. Due to health reasons I want to become a silent partner. Of course the operating agreement is key, but are there any general legal precedents as far as when someone wants to retain ownership but not manage the business anymore? This doesn’t seem to be well addressed in our documents.
Larry Donahue says:Hi, Arthyr. Legal precedents? Not really. If your situation is not covered in the existing Operating Agreement, you need to look to the domestic state LLC Act (or Statute), and see what it says. For example, some states give the Manager supreme power (i.e. FL), regardless of ownership level. My recommendation would be to hire someone to weigh in on what the statute says, and if it’s not going to cut the mustard, see if you can amend the OA. Good luck to you. Larry.
Paula R says:Quick question. If a “member” of an LLC decides to leave the company and the company has zero assets what kind of financial obligation does the business have to said partner? The member wants all start up cost returned to them.
Larry Donahue says:Hi, Paula. Hard question to answer. It depends on how the Operating Agreement reads, and if no Operating Agreement then what state law says. Specifically, can a member to voluntarily withdraw? If not, then the departing partner needs to negotiate something with the non-departing partners. If voluntary withdrawal is permitted, then you need to look at how it can be accomplished. Typically, there will be language to valuation. Fair market value or book value are the two common types, but there are others, and there are different ways to calculate these things. I’ve never seen statute or an Operating Agreement that allows folks to leave, not be liable for any liabilities, and get back what they put into it. That’s kind of the point of owning a company — you take the risk and reap the rewards. I would recommend you hire an attorney in the state the company is registered in, to help you navigate these issues. Larry.
Danial says:I belong to a 2 party LLC.I have 70% and my partner has 30%. In our LLC Operators Agreement it names me as the registered agent and under the paragraph titled management of the company it states
Except as expressly provided elsewhere in this Agreement, all decisions respecting the management, operation, and control of the business and affairs of the Company and all determinations made in accordance with this Agreement shall be made by Danial ######### in all situations including any and all decisions about financial matters, employment matters, and decisions that regard the partnership such as dissolution and adding or removing minority ownership members. All decisions made by the majority owner are final and not subject to question or vote by any other member. Minority owners waive any and all rights to any civil suit or judge\jury trials over decisions made by the majority owner. The minority owner understands that his\her capacity as a partner is subject to change without any prior notice and may be terminated at any time with out compensation. In cases where the majority owner is not able to perform his duty to make these decisions the minority member can step in in a limited capacity to make any decisions needed to retain the business in its current form as it was left by the majority member. This does not allow the minority owner to enact decisions that affect the percentage of ownership of any member. In case of the death of either member their ownership percentage transfers to whomever the member has designated in his\her Legal Will. If no Legal Will exists or no beneficiary is documented in the legal will all of the deceased members ownership percentage transfers to the remaining member(s) that have the highest remaining ownership percentage.
Am I able to transfer all ownership and liabilities to the minority member and withdrawal entirely from the LLC?
Hi, Daniel. Wow. This language was obviously NOT drawn up by an attorney and has a LOT of problems with it — many of which depend on the specific state of formation. Another problem, just off the top of my head, relates to “tqx status” and specifically, if you were trying to tax yourself as a S-Corp, the language would either be invalid or your S-Corp tax treatment would be invalid, subject to disqualification, which would then mean your LLC defaults to a C-Corporation with all the tax consequences attached. So, your question is basically, “Does this language mean you can do whatever you want to the minority member?” Typically, the answer is going to be “doubtful” at best and “no” at worst. The language is obviously very one-sided. Is there an adequate bargained-for exchange in value? Would this be viewed as an adhesion contract? Or, is there some other standard contract excuse to warrant unenforceability, voiding or rescission? If such a decision negatively impacted that minority member (i.e. there’s a lot of debt and liability attaching to the LLC) and you were trying to remove yourself from that liability in this fashion, I don’t see such a move passing muster (i.e. being able to defend against it, as against the minority member or anyone attempting to pierce the corporate veil). But, all of this is academic and requires an understand of the circumstances that lead to this OA, the circumstances surrounding your intended departure, the specific state statute governing LLC’s, etc. Good luck to you. Larry.
David says:I took a job during COVID after being unemployed for six months in California. I was a temporary employee for four months with an agreement to become a partner with 2% equity for each year of service up to 6% after three years. I extended my contract verbally for 11 months then became a full-time employee. I was full time employed for three months but never signed a formal agreement to become a partner. I then quit and took a full time job. How can I ensure I have no implied contract? I never signed the non-disclosure agreements nor the non-compete agreements. Can I be sued for future contract losses? The company is losing money badly.
Larry Donahue says:Hi, David. Great questions. The easiest question for me to answer, is probably the least helpful to you: How can you “ensure” you’re okay? Enter into some sort of separation agreement. Before you dismiss this out of hand, think about it for a minute: I know the company is losing money badly, but they sort of made a promise of equity to you, and something didn’t work out. You are a risk to them. It would be in their best interest (and of course yours) to sign a separation agreement. You agree that you have no interest in the company, and you will not demand anything in the future, and they release and hold you harmless from any liability or obligations. Assuming that’s not possible for some reason, implied contracts are tricky things. So are oral agreements. If they “detrimentally relied” on something you said (i.e. you promised to sign the NDA’s, and they in turn release trade secret information to you), you could have potential liability. And, and there can be other legal duties (i.e. not releasing trade secret information, for example) that you may still need to adhere to. So, I really cannot tell you “you’re going to be okay.” It’s dependent on a number of factual circumstances. If you are really concerned, this is where you should probably hire an attorney to review everything and give you an opinion. At the least, it can help you sleep better. Sorry I cannot provide better help. Good luck to you. Larry.
Adam says:Hey Larry! Great article, thanks for the write up. A friend and I started an LLC (formed in DE based in NYC) with which we both share 50% stake in. I am the creative and he handles operations. For the past month or so he’s been behaving shady, and our last phone call ended sour in which he later on that night removed me from all business accounts. Such as bank, email & etc. I didn’t bring this up because I am not looking to get on his bad side due to his pettiness and recent childish behavior. Now I want to peacefully walk away (although he’s been giving me a difficult time because now I have no access to our Google Drive for legal documents so I will have to go through him, and I am pretty furious inside about all of this) Afterwards; we spoke via phone a day after and I verbally agreed to walk away and he can take over the company (I am really fed up with him / his tactics at this point) at this point my ultimate goal is to walk away and leave this behind. We’ve been operating for 6 or so months now, we have 1 client on retainer (which I’ve designed and developed the project for; but again I am okay with walking away because my goal is to get out) I am at a point where I am not interested in anything / or negotiating a buy-out (or even brought it up — I’ve been playing dumb in hopes of him treating me with more respect, which has been working) We have an Operations Agreement which states: “Resignation: A manager may resign at any time by giving written notice to the company and the other managers” (short version) Also, in the CIIAA document that I’ve signed, there is a “Termination Certification” I supposed my question (or questions — sorry) Thoughts? And; can I simply sign the “Termination Certification” and walk away? Will that remove my name from the LLC / Partnership and later on down the road not face any liability from the company? (sorry for the lengthy post and thank you)
Larry Donahue says:Hi, Adam. Thank you for your post. The “Resignation” you cite relates to being a Manager, and resigning as a Manager. That doesn’t address — without more — the ability to resign (or withdraw) your Membership Interest. You need to keep looking. As it relates to the “Termination Certification,” I have no idea what that means. When I say that, I know what those words mean, but I don’t know what those words mean in the context of whatever you signed. Does it give you the option to withdraw? Does it define a process to withdraw? What does it do? Based on the information given, it’s difficult to say what your options are. You need to hire an attorney who can speak on DE law, and review the OA and this Termination Certification, and let you know what your options are. If either of these are silent on voluntary withdrawal, then your lawyer will look to the Delaware Revised Uniform Limited Liability Company Act, to see what it’s provisions are related to voluntary withdrawal. (I don’t know, or I would tell you) Sorry I cannot be of more help. Good luck to you. Larry.
Bill says:Hi Larry, I was a Partner in an LLC (S Corp for tax purposes), and retired in January. Since then we have been going back and forth on valuation and payout time frame. We had a LOUSY Operating Agreement. Anyway, we have agreed on the valuation, and the payout period, but NOW I find they sent me a Promissory note to sign with a 2.93% interest rate on a payout where I’ll receive my initial funds on 15 Sep 2022, and then another in Sep of 23,and the final plus interest by Sep 2023. It is a Nevada LLC though we don’t have offices and all live in different States. Since the Operating Agreement doesn’t specify a certain interest payment, THEY are saying we need to use the Applicable Funds Rate (from the IRS), while I am thinking the ‘standard’ Prime +1. Thoughts or suggestions?
THANKS!
Hi, Bill. Apologies for the delay in responding to this. The answer really is, whatever is negotiated between the two of you. The AFR (Applicable Funds Rate) is the lowest interest that should be permitted, and your Prime+1 is certainly “fair.” Larry.
Sadie says:Hey Larry,
Currently in a partnership with a close friend. After the friend agreed to bring on two new members (still nothing signed) I do not feel comfortable continuing in the partnership. We agreed to back date my redemption agreement and right before we signed the two future members now want to meet with the business attorneys. I’m worried this is going to turn into a contested exit considering the two of them seem to have an unhealthy hold on my partner. In my redemption agreement I am only asking for the company to pay the tax liability for 2021, and I will then give all my equity in return. Do they have any rights to negotiate this? Is it time to get an attorney for myself? -Sadie
Hi, Sadie. I apologize for the delay in responding to this. I suspect the dust has already settled. If it hasn’t, then I would strongly encourage you to hire an attorney for yourself. The issues, and your options, are going to greatly depend on what has (and hasn’t) been signed, as well as your state’s specific laws on the issues. Larry.
sam says:Hi i recently resigned from an multi member llc in March of 2022. We signed the separation agreement and i am no longer part of the company. The question i have is the company showed profit in 2021 and will have profit in 2022 for the time i was a shareholder and they are refusing to pay me the amount shown in the k1 and the reason they are saying that they are not paying is other partners are not taking distribution. Can they do that?
Larry Donahue says:Hi, Sam. The quick question is, “probably.” If the partners aren’t giving themselves a distribution, then you’re not entitled to a distribution either. Distributions are different from profits. That’s why it’s good, when you sign a “separation agreement,” it includes addressing such a possibility. To get an exact answer, however, you really should hire a business attorney to look at everything and then let you know whether you have any claims. Good luck to you. Larry.
burton gasser says:our general partnership dissolved 25 years ago when my partner left and since I advanced all the funds for the mortgage, taxes improvements, there was no profit, in fact he would have owed me half the total expenses i paid for which would have been 40 K on his part. I let it go and over the years built up equity and paid off the mortgage. Now even though the partnership ended with the winding up and termination, he wants 50 percent of what i built up with over 250k of investments for improvements on my part. All the paper evidence, last tax return of 1997 shows him 0 percent and mine 100 percent. He has got to be out of his mind.
Larry Donahue says:Hi, Burton. Partnership can have all sorts of hidden consequences, if not handled correctly. This blog article addresses a lot of them, and you’re bringing up an excellent reason why it’s very helpful to have something written (and agreed to) by all the partners — to avoid something like this. My advice, for what it’s worth, is to treat this very seriously and hire a competent business attorney (in your jurisdiction) who can help you navigate all the ins-and-outs of this. You don’t want to ignore a demand or claim. Larry.
Sarah says:My husband was in partnership LLC with his brother. My husband died and I would like to “give” his share of the partnership to the manager who has been doing my husband’s share of the work since his death. We are all in agreement – just don’t know how to legally do this. They want to keep the business name, bank accounts all the same and just replace my husband’s name with the manager’s name. Is this possible? Can I sell him (the manager) my share of the company for $1? This is a construction company and it has continued to run uninterrupted since my husband’s death in January; however, I don’t want the liability and have never had any interest in the business. Everyone involved just wants the company to continue to exist as-is, except for replacing the name. They formed the partnership, registered it online about 10 years ago, and never had a lawyer involved. There is no payroll or anything…when they have a job in progress, they pay their subcontractors and then split the profit. Thank you in advance for your help.
Ryan Bell says:The answer is “it depends.” Hopefully, the operating agreement or articles of incorporation for the entity had a clause for a procedure in the event of a death of one of the members/partners. If not, or if it is written poorly, or if it is written in such a way that dissolution occurs, there may be other things that can be done to remedy the situation. I am prefacing this all on the presumption that you have legal title to the shares, which will need to be verified. The specific course of action may also vary by state, and I do not know what state you are operating within. However, you are also describing some business practices that are waving some big red flags for me regarding no payroll, sub-par business formation, and tax liability. I am going to include a link below to sign up for a consultation: https://www.l4sb.com/services/attorney-consultation/
Lucas says:I am 50% owner of a 2 member LLC. Due to irreconcilable differences, I am going to give her my ownership with payment a small amount of my capital investment. We have found a very reasonably priced lawyer to draw up the paperwork, and I believe this should be a company expense. My business partner, however, is digging in her heels & insisting that I pay 50% from my own money, while she will pay the other 50% from the business account. As it is still my business, and this is a business expense, am I within my rights to expect the business account pay the full amount? Thanks for your help!
Ryan Bell says: Who does the attorney represent? Sydelle Saks says:Question regarding a 51/49 partnership on a business. I inherited the 51% partnership of this business. The 49% partner is another family member who also inherited it. What are my responsibilities to the shareholder of 49%. He does not work in the business and there is no current operating agreement between us as the family member just passed away recently. He was a sole proprietor and had no partners then however his will gave instructions that I am to run the business with 2 employees who will continue to receive 1099’s at year end. Kindly advise
Larry Donahue says:Hi, Sydelle. I would recommend you hire a business attorney in your jurisdiction, and see what he or she says. If you were in my jurisdiction, I would tell you that the both of you have a “duty of loyalty” and “fiduciary duty” to one another, and those are actual complicated areas of the law. The quick overview would be, you need to treat each other fairly and faithfully. You cannot usurp corporate opportunities for personal gain. Everything must be done above-board, with arms-length transactions at fair market value. If one is working for the partnership, and the other is not, I would expect the working partner to be paid a “reasonable salary” or income for what he or she is doing. The other one wouldn’t be paid for their work, of course, although they would be entitled to the profits and/or losses of the company. Typically, it’s customary for one to buy out the other one, if one doesn’t want to work on behalf of the partnership. There are numerous ways to structure such a deal, especially if you don’t have the cash sitting around to make a deal like that happen. Good luck to you. Larry.
