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Situation:
I own exactly one half of an S-Corporation with one other individual.
We began the business 6 months ago with funds transferred from
personal funds of his father totalling $100,000. Total up-front costs
and general operating expenses leave us with approximately $40,000 in
cash, plenty of inventory and nearing break even six months in.
My business partner just met with me and told me that his dad made his
money "immediately callable" and took the cash ($40,000). I was then
told that we would not have the capacity to pay ourselves. My
personal life allows for MAYBE two months of income free living, while
he and his father have more than enough savings to be comfortable
personally for quite some time. I was then told that if I were to bow
out and transfer my ownership, the money would be "re-invested"
immediately. In other words, he would have 100% ownership in a
company nearing profitability.
I am being squeezed out with no available options and feel like this
cannot be legal. I am researching it, but am not familiar with
corporate law as it relates to family loans and relationships,
financial gifts vs. loans, and half-owners right to dispurse excessive
money to creditors. Other pertinent info: I have never signed, nor
have knowledge of a signed note or any terms of repayment. The money
was transferred back to the father directly out of an account under
only the business name.
If ANYONE can tell me anything legally binding or if I have any leg to
stand on or even advice on how to handle it, please let me know. The
company and all participants reside in the state of virginia. THANK
YOU in advance.
Daniel Victor
dvictor11@msn.com
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Dan,
You and a partner began a business as an S-corp about 6 months ago. The
partner has supplied all funding for the corp up to this time. He no longer
has the funds to operate the company. You were told by "someone" that
operating funds would become available if you relinquish your ownership. The
company may break even in 6 months time.
From what you've posted it does not sound as if you can afford to sue
your partner. You also do not indicate why you want to sue him. You need a 6
month line of credit to run your business until it begins to break even.
Getting a loan from a bank will be quicker, cheaper, and easier than sorting
your problems out in court. In the future it may be wise to know a bit more
about your business and businesses in general. Get the catalog from your
local community college.
Good luck,
Dave M.
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Situation:
I own exactly one half of an S-Corporation with one other individual.
We began the business 6 months ago with funds transferred from
personal funds of his father totalling $100,000. Total up-front costs
and general operating expenses leave us with approximately $40,000 in
cash, plenty of inventory and nearing break even six months in.
My business partner just met with me and told me that his dad made his
money "immediately callable" and took the cash ($40,000). I was then
told that we would not have the capacity to pay ourselves. My
personal life allows for MAYBE two months of income free living, while
he and his father have more than enough savings to be comfortable
personally for quite some time. I was then told that if I were to bow
out and transfer my ownership, the money would be "re-invested"
immediately. In other words, he would have 100% ownership in a
company nearing profitability.
I am being squeezed out with no available options and feel like this
cannot be legal. I am researching it, but am not familiar with
corporate law as it relates to family loans and relationships,
financial gifts vs. loans, and half-owners right to dispurse excessive
money to creditors. Other pertinent info: I have never signed, nor
have knowledge of a signed note or any terms of repayment. The money
was transferred back to the father directly out of an account under
only the business name.
If ANYONE can tell me anything legally binding or if I have any leg to
stand on or even advice on how to handle it, please let me know. The
company and all participants reside in the state of virginia. THANK
YOU in advance.
If the investment by the father was a callable note, you should have known
about that. It was your responsibility to find out how the company was
going to get the operating money. And you still don't know, because you
haven't seen the note. As a 50% owner, you should be on the board of
directors. If you are, then you haven't done a directors job, keeping track
of what's happening re investment deals. If it was a callable note, and you
were not lied to, then you're sunk.
But I don't believe your partner. I think you are being scammed. I think
that IF there was a note, the partner and the father conspired to cheat you
from the beginning. That is, assuming you made some investment (you didn't
say). Maybe they were intending to cheat you out of six month's work. If
there was no note, then there was an investment, and the partner had no
right to pay company funds to his father. That's embezzlement. And you can
sue for that, as breach of fiduciary duty to the corporation. And fraud.
I suggest you take the matter to a local business litigation attorney.
Lessons for the future, #1: If you are an investor or creator of a startup,
set up the company management structure so that you know what's going on.
Like being on the board or directors. Make sure you have a clear pipeline
into the books and records. Check everything.
Lesson 2: If you are a non-majority owner of a non-publicly traded company
and you have less money than the majority owner, you can always be frozen
out.
Lesson 3: Don't be a non-majority owner of a non-publicly traded company.
McGyver
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McGyver,
I always like your answers but this one leaves me troubled. Unless it was
the intent of the other partner and venture capital father to scam the
poster out of his labor what will getting a lawyer accomplish here? Where
will the poster get the money to retain a lawyer? Since the Corp has no
money and probably few assets (unless "plenty of inventory" means lots of
money) what will a suit accomplish other than destroying the relationship of
the partners?
I think that the poster should view this as a business problem rather
than a legal one. The business needs money. The partners should focus on
getting a loan or finding a source of venture capital. Unless it becomes
clear that the other partner is dragging his feet about finding non-family
financing I think the poster is crazy to be rushing into a lawyer's office.
I do agree that he needs to immediately find out under what terms the
original money was obtained and why money was returned to the father.
Sorry to disagree with you here but I just don't see this as one for the
lawyers
Dave M.
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McGyver,
I always like your answers but this one leaves me troubled. Unless it
was
the intent of the other partner and venture capital father to scam the
poster out of his labor what will getting a lawyer accomplish here?
You're right, if there was no cheating, then there would be no point in
suing. But "take the matter to a local business litigation attorney" does
not mean there will be a suit. The attorney will evaluate the actions of
the partner, review the documents, consider the ability of the partner to
satisfy a judgment, and advise on whether there should be a suit. The point
of seeing the attorney is to get advice. Based on that advice, further
steps might or might not be taken.
will the poster get the money to retain a lawyer?
Why would you assume that the Original Poster (DV) can't afford legal
advice?
Since the Corp has no
money and probably few assets (unless "plenty of inventory" means lots of
money) what will a suit accomplish other than destroying the relationship
of
the partners?
Relationship, are you kidding? DV is being booted out of the business that
he invested six months of work in, and maybe also money. At a time when the
business is about to reach break-even. DV is about to investigate and get
some advice and find out if the partner's actions are a scam or innocently
ruthless and unfriendly. But in either case, DV needs a new friend.
I think that the poster should view this as a business problem rather
than a legal one. The business needs money.
The business had money. They are at the point of break-even. They had
$40,000 to get them over the break-even hump. Then the partner embezzled
the money and gave it to the father. Or the father called the note as part
of a scam to freeze out DV. Or the father called the note for no
economically valid reason, when the business is about to get past the
break-even point. The father's decision to call the note gets the $40K
back, but it doesn't get the other $60K back. And unless DV caves in,
father has clobbered his son's ability to make the business a success. Too
crazy. If there is no scam here, why did the father choose this time to
call the note, thereby killing the ability of the business to pay back the
$100K?
The partners should focus on
getting a loan or finding a source of venture capital.
They had a loan, according to the partner. Or they had venture capital. DV
should not now sign personally, to get a new loan, to replace money that the
partner either embezzled or scammed away. Doing further business with this
partner is not a road to financial independance.
Unless it becomes
clear that the other partner is dragging his feet about finding non-family
financing
The partner won't be going along with seeking a new loan. All he has to do
is wait for DV to cave in and then get $40K from father, and be the sole
owner. Why would you think that the partner will be cooperating about
seeking non-family financing, after the partner has told DV: "Sign here,
give up your interest in the company, and I'll get $40K from Dad"?
I think the poster is crazy to be rushing into a lawyer's office.
And I don't see any good alternative.
I do agree that he needs to immediately find out under what terms the
original money was obtained and why money was returned to the father.
DV isn't going to find out much. The partner might lie, or might show phony
documents, or maybe not. It's unlikely the partner will show DV any
documents inconsistent with the story the partner already told him. And DV
won't know if they are true documents anyway. The attorney will find out in
the discovery process.
Sorry to disagree with you here but I just don't see this as one for the
lawyers
There is one viable alternative. Walk away, take the loss, learn the
lessons, find a new friend. Get a job or start a new business. This
alternative has the advantage of focussing on the future and not spending
money trying to redress the past.
McGyver
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Thank you both for your responses. I do appreciate them. Let me
clear up a few things that you mentioned and see if your response
changes or stays the same.
The original money came from Nick's (parnters name) father (Bob) in
the amount of $100,000. Nick and I are the only two officers and
owners. I am officially (State Corporation Commission) the President,
he is the Secretary. After spending $55,000-60,000 on inventory,
start-up costs, customer development, etc., the company has lost all
the money it is going to lose and is right on schedule. We have two
bank accounts. One is for general operations and carries a minimal
balance. The other was a lump sum of money; $40,000 as of Monday.
That account was emptied and CLOSED by Nick and the money given back
to his father. There is no note. If there was, it was behind my
back, and I don't even think there can be a legally binding note
signed by only the secretary.
My business partner told me that the money has been given back to his
dad. My partner will not seek alternate financing. He refuses. He
simply says the business will barely operate, short of paying
ourselves until which time I decide to leave him my half. I cannot
secure a line of credit that size ALONE, and again...HE REFUSES. His
father has possesion of this money now and can simply pay my partner
what he was making under the table and the only one screwed is me.
Questions listed below.
Is this not an obvious misappropriation of funds?
Could this qualify as extortion, racketeering, or fraud?
If the money was in an account under the business name only with two
signees, my business partner and myself, isn't it OWNED by the
company, and its withdrawal theft?
I have read in several places, not many of them reliable that a loan
from relatives over $10,000 without a note or specific terms of
repayment is a gift. True or false?
Thank you again ahead of time, and despite how it sounds, Mr. Martel,
I do know a good bit about owning and operating a business. This is
my friend of over a decade and his father has known me since I was a
kid. The only lesson about business I need to learn is not to trust
anyone. thank you for your advice though, and hopefully these details
help. thanks.
Daniel
"David Martel" <marte005@earthlink.net> wrote in message news:<YpL3c.13491$%06.3083@newsread2.news.pas.earthlink.net>...
McGyver,
I always like your answers but this one leaves me troubled. Unless it was
the intent of the other partner and venture capital father to scam the
poster out of his labor what will getting a lawyer accomplish here? Where
will the poster get the money to retain a lawyer? Since the Corp has no
money and probably few assets (unless "plenty of inventory" means lots of
money) what will a suit accomplish other than destroying the relationship of
the partners?
I think that the poster should view this as a business problem rather
than a legal one. The business needs money. The partners should focus on
getting a loan or finding a source of venture capital. Unless it becomes
clear that the other partner is dragging his feet about finding non-family
financing I think the poster is crazy to be rushing into a lawyer's office.
I do agree that he needs to immediately find out under what terms the
original money was obtained and why money was returned to the father.
Sorry to disagree with you here but I just don't see this as one for the
lawyers
Dave M.
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dvictor11@msn.com (Daniel Victor) wrote in message news:<d273f6e6.0403102058.56a25fdd@posting.google.com>...
Thank you both for your responses. I do appreciate them. Let me
clear up a few things that you mentioned and see if your response
changes or stays the same.
The original money came from Nick's (parnters name) father (Bob) in
the amount of $100,000. Nick and I are the only two officers and
owners. I am officially (State Corporation Commission) the President,
he is the Secretary. After spending $55,000-60,000 on inventory,
start-up costs, customer development, etc., the company has lost all
the money it is going to lose and is right on schedule. We have two
bank accounts. One is for general operations and carries a minimal
balance. The other was a lump sum of money; $40,000 as of Monday.
That account was emptied and CLOSED by Nick and the money given back
to his father. There is no note. If there was, it was behind my
back, and I don't even think there can be a legally binding note
signed by only the secretary.
My business partner told me that the money has been given back to his
dad. My partner will not seek alternate financing. He refuses. He
simply says the business will barely operate, short of paying
ourselves until which time I decide to leave him my half. I cannot
secure a line of credit that size ALONE, and again...HE REFUSES. His
father has possesion of this money now and can simply pay my partner
what he was making under the table and the only one screwed is me.
Questions listed below.
I'm not a lawyer (or even particularly acute at business matters) but
the whole thing doesn't seem kosher to me. What I don't understand is
why you don't take advantage of the opportunity apparently presented
to you?
I assume that, unless you signed it away somehow, you are still
entitled to 50% of the profits, correct? If I were in your position I
think I'd go and find something else to do for a while and let Nick
carry on running the business. Then I'd show up once a month with my
hand held out. I don't imagine there's anything in the articles
dictating that you have to be an ACTIVE president, is there? Nick can
hardly afford to let the business just slide because then Nick will
owe Daddy $60K if the company fails.
Which brings up a point. Exactly WHO owed Bob the $100K? Nick? You
and Nick? The corporation?
FoggyTown
"It may be only your humble opinion, sir, but it happens to clash with
my authoritative one."
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You guys all bring up very valid points and have already been a big
help. First thing I should say is that I am not going to SUE anyone
unless it were an obvious case of something. I would just like to
have my legal info straight, because it would help in strong-arming at
least a nice settlement. Second, I do not have to be an active
president, and at this moment, I have signed NOTHING over. I have a
meeting with the father in one hour. I will let you know how it goes,
but I wouldnt be able to collect a paycheck until the loan has been
completely paid off according to my business partner which would
probably take three to four years.
As far as WHO owed the money. It is NOT ME. I know this because I
signed NO promissory note, not terms of repayment. It was something
Nick took care of with his dad and the money was just there. So
either HE owes him or the company, the latter being much more likely.
A few of you are getting a good idea of how I feel. It is a nice
little plan to squeeze me out conveniently because even my business
partner has said that all the money will return immediately following
me leaving. Hopefully that clears up a little more.thanks again.
Daniel
foggytown@aol.com (Mike Girouard) wrote in message news:<cb8d4013.0403110234.76e0aadb@posting.google.com>...
dvictor11@msn.com (Daniel Victor) wrote in message news:<d273f6e6.0403102058.56a25fdd@posting.google.com>...
I'm not a lawyer (or even particularly acute at business matters) but
the whole thing doesn't seem kosher to me. What I don't understand is
why you don't take advantage of the opportunity apparently presented
to you?
I assume that, unless you signed it away somehow, you are still
entitled to 50% of the profits, correct? If I were in your position I
think I'd go and find something else to do for a while and let Nick
carry on running the business. Then I'd show up once a month with my
hand held out. I don't imagine there's anything in the articles
dictating that you have to be an ACTIVE president, is there? Nick can
hardly afford to let the business just slide because then Nick will
owe Daddy $60K if the company fails.
Which brings up a point. Exactly WHO owed Bob the $100K? Nick? You
and Nick? The corporation?
FoggyTown
"It may be only your humble opinion, sir, but it happens to clash with
my authoritative one."
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I aplogize for being a newbie and bumping a post this old, but when Idiscovered it, I had to reply. This post was posted by my old businesspartner. I am the Nick in the post. I just find it humorous to hearone person's side of the story and the blatant omission of Daniel'sside, so I figured I'd chime in and add my own side of the story.
Background: Daniel and I started our S-corporation with theunderstanding that I would handle the financial recordkeeping,bookkeeping, and accounting for the business, and Daniel, asalesperson, would manage the storefront and sell phones. For somereason, Daniel felt that meant that I would front the entire $100,000start-up cost. I never had any indication going into this that Danielhad less than stellar credit. He's always had a good job, a nice car,and a house with equity. But once we got going, he felt it was myresponsibility to front the money for the business. I reluctantly didthis, by borrowing $100,000 from my father. My father did this becausehe had known Daniel for 10+ years, as had I.
Anyway, business started off good. We were going through the usualgrowing pains of the business. After a few months, I noticed that Iwas working MUCH longer hours than Daniel, and I was having to pick upfor his slack. He began coming in very late for work (11:00 or later)and leaving early (3:00). I slowly became both a financial officer,and a salesperson, as we only had one other retail employee. Danielwas clearly not doing much to help out. I confronted him several timeswith very short term results. It continued that I worked 6 day, 50+hour weeks while Daniel worked 20-30 hours, yet received the same pay.
The final straw came in February when I discovered 3 phones posted forsale by Daniel on Ebay. I asked Daniel several times what happened tothe phones, and he gave me stories like they were destroyed, they weresent to the manufacturer for repair, etc. However, because of theserial number on the phones, and our shipping records, I knew thiswasn't the case. I kept bringing the issue up until the day of theclose of the auctions. At that point, I met with Daniel in a privatelocation, and I said that I knew about the phones he was selling one-bay, and I wanted to know why he was doing it. He denied it. Ipresented the e-bay listings, and he still denied it, and accused me ofbeing a "bad friend" for indicating that he was doing something shady. I basically said that if he wouldn't admit it, then explain it, whichhe couldn't do either, only saying that he was doing it for the store,at which point I reminided him that a) we have a cell phone STORE, whywould we not sell the phones there, and b) we have a STORE e-bayaccount for things like that.
Daniel stormed out and left. He reappeared at the office shortly tocollect his paycheck and then disappeared. He didn't come to work fora week. During this time, we exchanged several e-mails which I won'tdive into, but the long and short of it is that he denied his actions,and tried to make it seem like I was quizzing him. I restated that Ionly wanted to know the truth, and he would not ever tell that to me.
After this, I went to my father for advice, and he said that he wasrecalling the loan. All available cash went back to him (~$40,000). All continued operating profits went towards paying debts andemployees. I notified Daniel of this, and he was quite upset. Hebasically stated that "Half of everything in that store is mine. Halfof the cash, half of the phones, half of the desks, everything. And Ican do whatever I want with my half." I reminded him that indeed halfwas his, but that also included half of a $100,000 debt ($40K of whichhad been recalled). For some reason, he never took this intoconsideration.
I told Daniel that the business can not survive off of it's currentcash flow. His statements herein about the business being close tobreak-even are VERY far off. Something he would've known if he wasever in the store. Had we continued paying ourselves what we were, thebusiness would've burned through the cash in a matter of months. I onlyrecently reached break-even, a full year and a half after this incident,and I did not pay myself one dime for over 6 months just so the storecould survive, and still make very little.
Upon telling Daniel this, he was presented with some options. 1)Refinance the loan, repay the $30,000 balance due (his portion of the60K) and buy me out and take over the business. 2) Sign over hisportion of the business to me at which point I will refinance theentire loan and continue as the sole owner, or 3) drag this whole thingout and go under, taking 2 employees and our Franchise's name with us. Upon hearing the options, Daniel quickly changed his story, admittingto stealing the phones and selling them on e-bay. He expected that hisvery tardy apology would clear the air. I informed him that if he hadonly said that initially, we could've moved on, but that it was toolate now.
Daniel couldn't refinance under option 1, and thankfully had somerespect for our employees and didn't choose option #3. So we agreedthat even though the business had negative equity of 10's of thousandsof dollars, I would pay him $6,000 in severance pay in exchange for hisequity in the company.
Daniel signed all legal documents agreeing to this and signing over hisrights. At that point in time, I changed the locks and assumed soleownership. Well, unbeknownst to me, Daniel had stolen 3 checks fromthe business checking account and decided that he would go ahead andwrite himself a $6,000 check and cash it just in case we didn't payhim. His $6,000 indiscretion caused me to bounce several checks as thebank account was running very low because the loan was not yet reissued.When told that he was to return the $6,000 in cash immediately, Danielsaid that he wouldn't, because he could write a check on the account ifhe wanted to. A little clarification on his part was needed as to whatthe definition of improper allocation of funds was, since he no longerowned any part of the company, and then he agreed to return the money.
Long story short, he was paid the $6,000 in severance pay, and I tookover the business in full. The only thing that lead to this split washis unwillingness to work, and his willingness to lie and steal fromthe business on the concept that "It's half mine and I'll do whatever Iwant with my half," even if it meant taking things without tax recordingof the sale, etc. If Daniel would've just done his half, and not feltthe need to steal from the business, we would probably be a partnershiptoday.
Was he squeezed out, technically, yes. Was it because myself or myfather was trying to take advantage of him? No. I was not about to bein business with someone who had no work ethic and sticky fingers a mere4 months into business, and obviously, if I/my father was the source ofthe funding for said business, it wasn't going to stick around eitherif it wasn't legally obligated to! The only reason he had limitedchoices was because of his own actions and his own spendingindiscretions that lead to him having poor credit in the first place.
In retrospect, this was definately a life-changing event for me. Ilost a very good friend, and learned that in business, you should trustno one when it comes to money. I am happy t
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It is hard to tell for sure who is right on this one, most
partnerships don't work. If you ever get into one, get a good lawyer to
draw up written contracts, and keep a reserve of at least $20,000 in an
account that you control for the sole purpose of defending your
position legally if you need to. I used to think you could trust
friends and that money for lawyers was better spent building up the
company. Boy, was I ever wrong.-Jitney
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I sympathize..been there done that...anytime they don't invest money they
don't have the same vested interests..and now you know why he has no money,
no credit etc....he has no work ethic and is apparently a person in need of
responsibility and growing up. Your stomach should have had alarm bells
going off when you learned you had to foot all the costs. A lesson hard
learned.
medusa
I aplogize for being a newbie and bumping a post this old, but when I
discovered it, I had to reply. This post was posted by my old business
partner. I am the Nick in the post. I just find it humorous to hear
one person's side of the story and the blatant omission of Daniel's
side, so I figured I'd chime in and add my own side of the story.
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