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Ask A Lawyer: Carrie Cook

In our twenty first installment of “Ask a Lawyer” we featured questions from Carrie Cook. She answers questions about Joining or Leaving a Partnership as well as Operating Agreements.

[Albuquerque Journal: ‘Ask a Lawyer’ Talks to Carrie Cook]

Who is Carrie Cook?

Carrie Cook grew up in New Mexico but moved to the United Kingdom at 18 to pursue her undergraduate degree. She graduated from the University of Wales, Aberystwyth, with an LL.B. in law before attending law school at the University of New Mexico School of Law. She received her Juris Doctorate and was admitted to the Bar in 2015. She has primarily worked in real estate, construction defect, contract enforcement, and mediation. She has regularly provided legal assistance to corporate clients.

Read it here

Question 1:

My business partner has always handled the bookkeeping/banking issues in our business.  We are the only two employees. Recently my partner had a leave of absence and while he was out, I spent some time looking at our bank statements and bookkeeping entries.  I noticed that he has been paying many personal expenses via our company checking account.  I have not done such things as I would never treat our company bank account as my own personal ATM.   I have many concerns and feelings about this. I have been thinking about it and I don’t want to be in business with him anymore.  I want to sever ties but as we start splitting up assets, I want to be aware of what to consider going forward. 

Answer 1:

Thank you for your question, that is a difficult position. It will be important for you to determine the way in which your business partner was taking money out of the business account. If your partner was not paying this money out as a salary or distribution, then there may be potential tax liabilities.  You may want to consult with an accountant or tax attorney. Something else to keep in mind is what your operating agreement specifies for distributions and expenses. Your partner may be in violation of the operating agreement and may also be in breach of his fiduciary duties.  Partners in a business are not generally supposed to act in ways that are detrimental to their business partners or put their own interests above the interests of the business.  This would be something you would need to discuss in detail with an attorney.

As for breaking up with your business partner, either you or your partner may choose to buy out the other and continue the business. There should already be language in your existing operating agreement regarding how to distribute the company assets should either of you decide to do this. You may choose to hire an attorney to draft a signed agreement and release. If you decide to carry on the business without your partner, you will probably need to revise your operating agreement and filings with the secretary of state to reflect sole ownership. If you choose to dissolve the business, how you dissolve your business will depend on what kind of business you have, and what distribution plan you agreed to in the operating agreement. Assets will need to be divided to pay creditors, then divided according to the operating agreement.

As far as registering the dissolution, there are slightly different ways to dissolve a corporation or an LLC, but both need some kind of member resolution and filing with the secretary of state. An LLC, for example, can be dissolved either by the written consent of the members.  As far as registering the dissolution, it depends on what type of business you have, but generally you need to file with the secretary of state notifying them that you are dissolving your business. For example, you can dissolve an LLC by filing articles of dissolution with the secretary of state. Once filed, only the people named in the articles of dissolution can act for the LLC in winding up the business. Similarly, corporations must file a statement of intent to dissolve with the secretary of state. Once filed, the company can wind up its existing business affairs, but cannot continue to transact business. The corporate entity continues to exist until the state issues a certificate of dissolution. The procedure for winding up a business can vary depending on your operating agreement and type of company, so it is important to review your company documents before beginning this process. You can always seek out an attorney to assist you with winding up and dissolving your company if you have questions.

Want to join or leave a partnership? 
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Question 2:

My partners and I have an LLC.  Additional members to that company are our respective spouses.   Since then, my wife and I have divorced.  My ex-wife has remained a member of the LLC since the divorce but has moved out of state.  In recent weeks, her sister has informed me that my ex-wife has transferred her membership to her.   I don’t want to be in business with my former sister in law.  How can the rest of us in the holding company prevent this transfer of interest from happening?

Answer 2:

Thank you for your question. The easiest route would have been to buy your ex out of the LLC during or shortly after the divorce. Since this is no longer an option, we need to look at whether your ex could assign her interest in the LLC. This will come down almost entirely to what is in your operating agreement, which is why it is so important to have a well-drafted operating agreement. If your operating agreement does not address transferring membership, or if you do not have one, then the default is what the statute says. Interest in LLCs are generally transferable in New Mexico, so whether your ex could assign her interest will depend on what is in your operating agreement. Unless your operating agreement prohibits interest transfers, then the transfer to your sister-in-law may be legitimate. Barring language in the operating agreement saying otherwise, assignees are entitled to only the distributions and returns which the original assigning member would have been entitled to. Assignees do not automatically become members unless that is how the operating agreement is written. Assignees can only become members by the other members’ unanimous consent, or by some other way specified in the operating agreement. What this means is that as far as the LLC is concerned, you will have to make the same distributions to your sister-in-law that you had to make to your ex, but your sister-in-law is not necessarily as member of the LLC. It should also be noted that if there are any liabilities, your ex is not necessarily off the hook just because she transferred her interest.

You can also inquire with your sister-in-law about whether she would be willing to sell her interest in the LLC to you or the other remaining members. If she isn’t interested in the business, she may be willing to sell it back to you for the right price.  You will probably want to closely review the operating documents for your LLC with a lawyer to determine how members are created and whether interests can be assigned and whether your ex has completely removed herself from the LLC. An attorney can also assist you with the negotiation and paperwork should you sister-in-law be willing to sell.

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What is Ask A Lawyer?

Ask a Lawyer is a twice per month open to the public legal question and answer session with real lawyers. We want to be able to provide real people answers to real questions. We partnered with the Albuquerque Journal’s Business Outlook to provide everyone a way to reach out and have their questions answered. Do you have a legal question you need to have answered? Email us at [email protected] to have your question answered. We review all the questions that come in and provide answers to the ones that are most important to you anonymously.

Read previous Ask A Lawyer Blogs

We know that there are people out there who don’t have a subscription to a newspaper or maybe you get all of your news online. That’s why we have an archive of all the previous Ask A Lawyer blog articles for anyone who wants to read them.

[Read: Ask A Lawyer Archive]

If you’re looking for a printable version of our archive, click here.

You can also find the questions on the Albuquerque Journal’s Website and if you want to subscribe to the Albuquerque Journal, here’s a link to get a subscription.

Tell us what’s important to you.

We want to hear from you. Send us your legal questions to [email protected] we want to provide our community a way to reach out to real lawyers and attorneys and be able to feel that you are starting off on the right foot.

[Read our previous installment: December 2019: Ask A Lawyer: Larry Donahue]

Law 4 Small Business, P.C. (L4SB).
A little law now can save a lot later.
A Slingshot company.

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