Do I need to buy out my partner upon dissolution of a LLC?
I started an LLC 5 years ago in Pennsylvania. I brought a partner on board and his share is 49%. We never had a formal Partnership agreement. He never took a salary and just paid expenses. We never really made any profit after paying my salary. He now wants to dissolve the corporation. He is saying to dissolve the company I must buy out him out. My partner never made any capital contributions, he only paid expenses. He also never paid any taxes only I did. My questions are:
1. Do I really need to buy him out?
2. Is he entitled to back profits (which were very minimal)?
3. If there are no assets for the company, what will he be able to get out of the business upon dissolution?
Thank you in advance for your help.
There is no basis of a buy out as there is no partnership agreement. What I mean is there is agreed method of computation for this. Therefore (I am not an attorney) is to send the member a letter from you as managing partner informing him that you are buying their equity shares for $100. As a minority partner with no operating agreement he has no grounds to stand on, include the check and send the letter certified mail (there is not a requirement he cash the check). I do not believe that an oral statement will stand as this is not a purchase agreement nor a contract for service, business law is not consumer law.
Last, what is the value he could sue for and unless there is fraud on your part you are not personally obligated to pay, the LLC is. They would need an attorney to take an injunction to court so we start with costs they need to front over $5000, probably more.
No you do not let him show you the reason why you owe him anything.. You owed him an opportunity...... anyway why didn't you guys talk about all this ahead of time? Expectations and Trust always
You're finding yourself in a very murky situation. Don't hesitate, don't walk, run to an attorney in PA and get some real solid advice. You mention LLC partnership, corporation - then you mention you got a salary. Partners and most LLC members don't get paid salaries - that's improper. You need to be clear in how your company was formed and in the absence of an agreement, your state law may dictate what happens here. No one wants to pay expensive legal fees, but if anyone who reads this is contemplating taking on a partner, work with an attorney. LLC members, partners, shareholders can all get sued when there IS a written agreement. So imagine what can happen when there isn't anything in writing. So tread lightly and get some really good advice before you make any more moves. Good luck - I hope it turns out well.
Well first, sorry to say, shame on you for not having an agreement in writing, neither a partnership agreement nor a buy-sell agreement so I hope that is a lesson to anyone who reads this. As a result it is perfectly clear that the situation is totally mirky. I agree you MUST have a lawyer's counsel in trying to come up with a negotiated settlement IN WRITING!! DO NOT TAKE THE ADVICE HERE TO REPLACE A PA BUSINESS ATTORNEY!!! A settlement will be more about what both parties want and are willing to accept because it is highly likely that if we asked your partner he may have a very different understanding of his value and your "agreement." Otherwise, the lack of agreement means that if there is no settlement and animosity remains you may well end up in court and the law and practices in PA will decide. If the law is clear then have your lawyer draft a document stating what is required followed by what you are willing to do if that is in any way different. Try to keep it civil and don't provoke things....and never make this mistake again.
If there is no formal agreement, there's no legal partnership. In any case, you don't need to buy him out. No, profit, no partnership distribution of profits. Upon dissolution, you get what you came with as far as property unless otherwise agreed upon. You must file your final tax return and note dissolved. However, in your situation, not written/formal agreement so you're only dissolving the registered biz model.
You need to see a lawyer. First if the LLC is being dissolved, why would you buy him out? Second you posting this confirms he is a 49% partner.
Third having no agreement can be even more dangerous to you since he has not been compensated for his share.
It almost appears as if you have pierced the protection of the LLC since you have neglected to put things in writing. (not so sure about LLCs)
If I were you I would see a lawyer right away, next I would move quickly to dissolve then move on.
When entering into any partnership or business relationship - it's extremely important to include documentation on EXIT Strategies (up front). This avoids the problem that is now occuring.
Since there is no contract or documentation, there's little that he can do legally. But if you wanted to dissolve on good terms, consider itemizing the following assets of the company (like disolving a marriage):
1) Document/list everything he put into the company ($$)
2) List everything is he took from the company ($$, and value of any assets)
3) List everything you put into the company ($$, tax payment and value of any assets)
4) List everything you took from the company ($$, salary, expenses, value of any assets)
5) List the profits of the company.
6) After all the +/- are calculated, and if there's a remaining balance.... give him 49% of what's left. If there's a -negative balance, decide what you want to do with that (he also owns 49% of the debt).
Show him the itemized balance sheet and start a dialog.
Check with an attorney to see if this makes sense.
Buy out what? No assets, no liabilities, no deferred income, no future. Unless you have a written agreement or procedures for dissolution are contemplated in your articles of incorporation, you should owe him nothing. A call to your attorney will be prudent, however as I am not qualified to provide legal advice.
1. Generally speaking, you can either buy out your partner and continue to do business yourself, or you dissolve the company and shut it down.
If you want to continue running the business, then you would need to buy out your partner. Since I assume you don't have an operating agreement or any sort of buy-out agreement that deals with this, you are looking at an old fashioned negotiation over the value of your business partner's interest and what he will accept.
If you want to cease doing business and dissolve the company, then you will be going through the winding down and distribution process. You take whatever assets the business might have (including liquidating any non-cash assets) and first pay off any company liabilities. Once all the liabilities, including loans to either of you, have been paid off, if there are any remaining assets then you distribute them between the two of you. This is normally done in proportion to your ownership percentage in the company.
2. If you never received any "profits" -- that is, money distributed after all expenses, including your salary for work performed, has been paid out -- then he isn't entitled to profits either. If you both worked in the business and you got paid a "salary" while he got nothing, then that "salary" would probably be treated as a distribution of profits and your business partner would be owed a proportional share.
3. Probably little to nothing if there are no assets. If you received profits (see #2 above) when he didn't, you might have to pay him his proportional share of what you received.
4. You need to contact a local business attorney and discuss it with him or her. The above is just generalities based on some basic facts you provided. Your actual situation will likely have many more complexities. The only way to receive a proper answer is to have a thorough discussion with a business attorney.
This is one of those areas where you need specific professional advice from your accountant and attorney in your state. Each situation is different and each state has different laws to follow.
1. You either need to buy him out or dissolve
At the surface it seems the answer is no because you never executed an agreement that stipulated this. However I am not an attorney and one way or the other, you need one now as it is quite possible that your "partner" is entitled to something and it appears he/she intends to get something.
When I set up my LLC the attorney asked me about having partners; I do not have or plan to have partners; he explained that if I do have even one partner we need to create a Buy-Out-Agreement to govern how we'll deal with others joining and/or dissolution of the business. He explained that a Buyout Agreement would spell out each partner's rights and obligations.
In addition, he told me I would need to set up an Operating agreement to structure (and document) how the costs and revenues of the business would be handled, again spelling out partner rights and obligations.
It sounds like you may not have one or both of these agreements. You may want to see if you and your partner can agree to see an Attorney, a Mediator or an Arbitrator to decide how you'll go forward. This sounds like a very tough situation -- I wish you all the best.