Dear Quentin,
I went into business with friends operating a night market. We hold big events every two weeks. We started an LLC as equal members, all with a 25% share.
Friend A had the idea to do it and said they wanted us to be their partners, and they would not do it without us. We all put in an equal amount of $2,000 for start-up capital. Friend A was unemployed at the time, and was available to work on the event 100% of the time.
Friend B had a part-time job, but quickly decided to quit and work for the LLC full time.
Friend C had a full-time job and would only be able to provide limited support.
Friend D was 6 months pregnant when we started and was available to help the event get started, but would soon have a baby and would eventually be going back to their job as an independent contractor.
There was no operating agreement put into place.
“‘By our third event it was very clear the event was very popular and we were bringing in a lot of money.’”
By our third event it was very clear the event was very popular and we were bringing in a lot of money.
We had been paying ourselves $1,000 each per event.
It was also about this time Friend A and Friend B started to push “buyouts” on Friends C and D, and started taking the stance that we were somehow bad friends to expect 25% of a company we were not going to work at.
I suggested we pay salaries like any other employee, on top of their profit share. They did not seem to like this idea. Friends A and B basically hijacked control of the company, blocked access to bank accounts, business documents, accounting, and funds to anyone but themselves.
The event has brought in over $1 million in revenue and Friends C and D have not seen a dime. Friends A and B seem to only want to talk about their original buyout offers of $5,000 for Friend C, and $8,000 for Friend D with no ownership.
I did not get into this business as a short-term investment. So far, they have not responded to calls to put an operating agreement in place. I would like to get one implemented to protect my distributive share.
Am I being unreasonable to expect continued guaranteed payments of $1,000 for each owner for each event we have put on, have salaries put in place for owners who work for the LLC, and keep ownership of the same?
Trying to be Fair in New Jersey
Dear Trying,
It’s time to stop trying to be fair, and start getting real. Before you do anything with friends — whether it’s going into business together as partners, investing in their company or even buying a property together — you need to do so with a competent lawyer, and make sure every eventuality and aspect of the company — governance, expectations, responsibilities, salaries, exit plans etc. — is written down in a rock-solid business plan. That prevents people from claiming the business as their own, or taking control of bank accounts or freezing other partners out.
You are no longer “friends” per se. You are business partners, and there is a large amount of money at stake so all presumptions of good behavior are off the table. You all invested an equal amount and, as such, you are all equal partners. If two of those friends are not pulling their weight because they have other responsibilities, you should deal with that, but Friend A and B cannot force them to take buyouts. That’s not how business works in real life. You and your other two friends need to hire a lawyer to sort this out.
“‘You are business partners, and there is a large amount of money at stake so all presumptions of good behavior are off the table.’”
Peter Mahler, partner and business divorce specialist at Farrell Fritz, agrees. “If, as the saying goes, misery loves company, our New Jersey friend should be feeling great. I’ve seen so many stories like this one involving friends who have a great idea for a new business, form an LLC through which to operate the business which then takes off, and then find themselves at odds over who’s contributing or not contributing to the business; how the profits of the business should be divvied up and, in the more extreme cases, who is or is not a member of the LLC.”
The laws governing LLCs can vary significantly from state to state, Mahler says. “When the members don’t have a written operating agreement, the LLC will be governed by the so-called ‘default’ rules in the LLC statute of the state in which the LLC is formed.” So consult a lawyer and negotiate a fair agreement with the other members with or without the help of counsel, he adds. “Think of it as the price needed to pay for not sorting out the responsibilities and expectations of the parties in an up-front agreement.” Failing that, you will need a mediator.
The ultimate — but not always avoidable — aim is to avoid expensive litigation, which will take an emotional and financial toll on all four partners, and may eat up the lion’s share of the money your LLC has made. You need to treat this as a business arrangement and put aside the baggage of being a “good friend” or “bad friend.” The gloves are already off, and your only aim is to come up with a path forward to share the profits equally, while agreeing upon salaries for the full-time workers. You may decide to dissolve the LLC, but as equal partners payouts will need to be made.
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