Love them or hate them, Business Partners can be a huge asset to your business. The best kind of Business Partners are the ones with similar goals, trust and a focus on the business. On the other hand, Business Partners can become become your worst nightmare, especially if your goals are mismatched, there is a loss of trust, the business is doing poorly or the partner is simply a bad egg (For example, read Avoid Narcissistic Partners). In this article, we will be discussing the bad type of Business Partner.
Is your Business Partner an Asset or a Liability?
Considering Business Partners
When considering entering into a partnership (or otherwise aligning with one or more partners), it’s very important to do so carefully and with your eyes wide open. This is especially true when the new potential partner is a friend or family member. For reference, we’ve written several blog articles in with tips regarding new partnerships, including Tips for Successfully Joining a Partnership and Considerations when Buying a Partnership Interest.
Leaving a partnership must be done with as much care as entering a partnership. We’ve written extensively on this, including Leaving a Partnership — How to do it Right and Rogue Business Partners. These are MUST READ articles if you’re thinking of leaving.
Leaving a partnership must be done with care.
Business Partners Gone Wild
Unfortunately entering or leaving a partnership can be messy. Business Partners often turn to litigation after they are “kicked-out” (or feel that they have been kicked out) by their partner or partners. Without any exaggeration, we’ve seen the following situations in the past 6 months alone:
- Planned Failure. We’ve seen a CPA charged with the financials of the company “doctor the books” to make the company look terrible on paper, and steal hundreds of thousands of dollars from the company in an attempt to make his partner “walk away from the company.”
- Violent Child. We’ve seen a son forcibly remove his father from the company premises. Keep in mind the father is the founder, majority owner of the company, owns the real estate the business is sitting on, and also happens to have his name on the titles to several assets. The son further attempted to forge the father’s name on a number of “corporate documents” in an attempt to defraud the father from the business, the real estate and the titled assets.
- Changed the Locks. We’ve seen a brother change the locks on the doors to his sister’s business, forcibly preventing the sister (the founder and sole owner of the business) from entering back onto the business. The brother eventually completely took over the business, left the outstanding debt in the sister’s name, and converted the business into something else entirely.
- Ganging Up on the Sick. We’ve seen one partner develop a serious disease that requires him to take some time off only to have his other two partners lock him out of the business, literally tackle him when he shows up in an attempt to collect his personal affects, and prevent him from accessing any of the corporate documents.
- Forced Retirement. We’ve seen younger junior partners gang up on the older founding partner, acting very aggressively in a hostile manner to influence corporate decisions, preventing distributions and insisting on enforcing corporate formation documents that have clearly been overridden by later corporate documents — all in an attempt to create a hostile working environment for the older, senior partner and attempt to force said partner into retirement.
Every one of these situations is simply unacceptable. Violence, intimidation, forging documents, bad faith, and not following corporate formation documents are never appropriate, and never a final solution. Despite this, what does one do when confronted with any of the above situations?
Before we give you tips on how to deal with these situations, please keep in the mind the following: It’s a very rare set of circumstances that would legally permit any partner from simply “kicking out” another partner. If it is possible for the partner (or partners) of a company to “kick out” another partner, it will be because the corporate formation documents (with every partner’s signature on it) permits this, but it will be a carefully choreographed process and almost always require the company to compensate the departing partner justly and fairly (otherwise, who would be willing to sign a formation document that permits themselves to be kicked out without any remuneration/compensation whatsoever?).
Please remember what I just said: If your partner or partners have “kicked you out,” it’s very unlikely that they can legally do so.
Stay Calm, Stay Safe, Document Everything
Avoid acting rashly or getting into dangerous situations!
Hopefully, you will never find yourself in any of the situations I described above. However if you ever are in such a situation, it pays to prepare yourself. Don’t panic. Keep yourself safe. Have an extra copy of the corporate documents in your home or another safe place outside of your office.
If you do find yourself in any difficult situation, please follow these tips:
- Never put yourself in a dangerous situation. If you feel threatened, call the police and file a police report.
- Avoid verbal confrontations as well as verbal agreements / compromises (which can be denied or revoked later). Make sure everything is written down, even the small stuff. Attempt to summarize conversations, agreements, factual circumstances, etc, in email.
- Avoid confrontations by yourself. Bring disinterested people with you, to act as witnesses and hopefully keep the other party at their best behavior.
- Seek the advice of a competent business attorney to help you understand your rights, duties and options.
- DOCUMENT EVERYTHING. Keep a journal.
- Be proactive. Don’t let such a circumstance fester, and don’t leave it alone for weeks, months or years. If you do, you may irreparably impact your ability to reclaim your business or its assets.
What options are available to you to resolve Business Partner issues and disputes? Thankfully, we don’t live in the “wild west.” Ownership in a company is like having ownership in your home — people cannot simply kick you out and leave you out in the cold. You have legal recourse:
- Simply hiring an attorney to represent you can have a profound impact with your partner, and the attorney may be able to negotiate something on your behalf quickly and cost-effectively.
- If your partner’s behavior is particularly egregious, you can seek a “temporary restraining order” (or TRO). Judges don’t necessarily like to issue TRO’s, so be prepared to back up your request with actual proof of egregious behavior. Violence, threats of violence, clear evidence of theft, dangerous activity, drug use, etc, can all be evidence of egregious behavior. Again, DOCUMENT EVERYTHING.
- You can file a lawsuit seeking “a judicial dissolution,” to kick your partner out of the company, or to compensate you for the loss of the business, lost profits or more. Lawsuits are expensive, time consuming and take a long time, so a lawsuit isn’t necessarily a “short term” solution for a bad or rogue partner.
- You can call the police, but beware the police will not get involved in “civil matters.” However, the police will get involved to keep the peace. Therefore, if you are seeking entry onto your business, but are threatened with violence, the police will (usually) intervene. If you wish to pick up your personal affects or make copies of corporate documents, the police will usually be willing to accompany you to prevent violence.
Ultimately, while it may take a long time, be fraught with emotional distress, and ultimately see your business significantly drop in value, you can be entitled to be “made whole” depending on the circumstances. Talk to a business attorney to understand your legal rights, duties and options and don’t lose hope. The law is on your side.
Law 4 Small Business, P.C. (L4SB). A little law now can save a lot later. A Slingshot company.
Join or Leave a Partnership
Thank you for the above article, it really helped me relieve some stress. My business partner/ex girlfriend and I broke up (our LLC operating agreement says we are 50/50 partners and both managers) and she has since completely taken over the business. She changed the bank accounts to her bank, change all email passwords and marketing sites. She also, dissolved our LLC without telling me and started another LLC by herself still using the same store names and assets. I have been in complete shock at what she has done and been depressed and stressed out for the last few months.
Sorry to hear that. I don’t know what to say, other than what I’ve said in the article above. If the company and its assets is worth a lot, it may be worth pursuing a cause of action. If it’s not worth much, it may not be worth the hassle.
I’m confused by your article then…..you said that a person CAN NOT just kick you out and take over a business.Yes the company is worth something. It’s 2 women boutiques and together they will bring in about $500,000 this year with a net income of around $180,000 or more. Our operating agreement says dissolution can only happen if 1) Vote by members holding at least a majority of interest in the company 2) Entree of decree of Judicial dissolution 3) sale or transfer of all company assets 4) Company has no members for 90 consecutive days 5) No automatic dissolution
I sent a Demand letter which she never responded to and that prompted her to dissolve the LLC.
I have served her a civil lawsuit already with 18 actions of fraud and she still hasn’t answered. She has until October 24 to answer. Also, when we found out she dissolved the LLC illegally, we served the DOES LLC on Oct. 9 and she has until Nov. 9 to answer as well
Wouldn’t a TRO be in order?
I strongly recommend you hire an attorney to represent you. It sounds like you sued her yourself, and you said “18 actions of fraud.” What you complaint needs to allege, aside from fraud, is breach of contract (the Operating Agreement), breach of a fiduciary duty to the company, negligent misrepresentation, misrepresentation, breach of duty of loyalty to the company, possibly a derivative action, and other causes of actions as appropriate. If she doesn’t respond, then that means you can seek a “default judgement” and then do whatever the court permits, depending on what specific remedy you asked for in your complaint.
TRO’s are difficult to obtain, especially if the damage is all monetary or can be resolved monetarily. If you were seeking either specific performance or an injunction, you should ask for that in your prayer for relief in your complaint.
When you go to court, there are many arcane rules that can confound a non-lawyer and representing yourself (called pro se) often results in frustration and loss. Also, you can potentially destroy your ability to obtain justice (and win the damages you are entitled).
Yes I did hire a lawyer….sorry for the confusion. The suit isn’t just fraud…its Breach of fiduciary duty and all the other stuff you mentioned. Below are the 18 actions against her.
PLAINTIFFS’ COMPLAINT FOR:
2. BREACH OF FIDUCIARY DUTY; 3. BREACH OF CONTRACT;
4. BREACH OF THE IMPLIED
COVENANT OF GOOD FAITH
AND FAIR DEALING;
5. AN ACCOUNTING;
7. PROMISSORY ESTOPPEL; 8. EQUITABLE RELIEF
(EQUITABLE LIEN OR
CONSTRUCTIVE TRUST); 9. UNLAWFUL AND UNFAIR
BUSINESS PRACTICES (Bus &
Prof. Code 17200, ET. SEQ.);
10. NEGLIGENT INTERFERENCE
11. FRAUD & DECEIT– INTENTIONAL
MISREPRESENTATION; 12. FRAUD & DECEIT– FALSE
13. DECLARATORY RELIEF;
14. CONSTRUCTIVE FRAUD;
15. ACTUAL FRAUDULENT CONVEYANCE
16. CONSTRUCTIVE FRAUDULENT
17. PETITION FOR APPOINTMENT
OF PROVISIONAL DIRECTOR
[CORP. CODE § 308(a)]; and
18. VOLUNTARY DISSOLUTION [CORP. CODE § 17707, et. seq.]
So I think it covers what you said. Thank you so much for taking the time to reply to me Larry.
I’m happy to hear this. It sounds like you have done the right thing, and hired a competent attorney to represent you.
I think you need to let this play out. The fact that your ex-partner hasn’t responded to the complaint will make things easier for you. If your attorney is able to obtain a default judgement, then you will have the power of the court to take back assets. Your lawyers will know how to enforce a court decision.
Good luck to you. Larry.
Hello. I own a construction company. I am 51 percent and my partner 49. my company is very small. about 3 years old. My partner an I could no longer work together. He’s irresponsible and a mess. He was secretary of the business account and managing the office work. My husband and I were on the field. He payed us no salary but would pay our bills and mortgage. Now he wants to sue me for that money back. Also we found checks for over 20,000 dollars being given back to one of our clients. Is he laundering money? What can I do?? I want him out of my life!
I really cannot answer the question on whether he’s laundering money or not.
It really sounds like you need to hire an attorney, have him or her look at your formation documents and give you some options. Options would include withdrawing from the company yourself, possibly auditing the books and determining whether your partner has committed embezzlement or otherwise stolen from the company, or simply working on some sort of amicable separation.
Thank you for the informative article. While it should make me feel better about my situation, it seems to only frustrate me more. I was shut out of a partnership over 18 months ago. Very deliberate actions were taken by my two partners leaving me with no income. Their initial story was that I had misappropriated funds, which was false; however they had a client’s in-house real estate attorney send me a letter stating this and notifying me that I was no longer a part of the business.
I obtained a lawyer, however, to this date, my former business partners have managed to drag this out. My legal fund is all but bankrupt. Meanwhile, they are still operating the business; however the details of how are unclear. The name of the business is the same according to the website, however, they started another business which is what they’re using for banking purposes. The kicker is that the client formed a business with a very similar name.
My question is regarding the client. The one that allowed his in-house attorney to send me the letter. I am not certain what discovery will show but my hunch is that either the client is acting as an investor of the company or is just assisting them to covering their tracks. I don’t think this would have gone this far if the client had not gotten involved. Can he be held accountable or liable for his involvement?
Meanwhile my former partners are continuing to live their lives, while mine has stalled. I have been turned over to collections for debts that they chose not to pay, regardless of documented conversations that they would take care of these debts. Now, I am even at the point of losing my home.
I realize that these issues take time, but I feel that months have gone by with no progress. Is this typical?
I’m really sorry about all the trouble you’re dealing with. I can only imagine how horrible this is.
Your question is, “is this typical?” I cannot say “typical,” but it doesn’t surprise me and I see this sort of nonsense with regular frequency. Partnership disputes can be very costly and take years to potentially resolve. In the end, there will be a monetary resolution to this, assuming you can maintain your lawsuit. You must do everything you can to continue the fight to the end.
The customer may have some liability, but may not. It’s really hard to say. I would leave that answer to your existing attorney.
I’m sorry I cannot provide more advice or give you better words of encouragement. Good luck to you.
Thank you for the above article, as it has shed some light on what could be the next step for me. My wife and I entered into a 4 member, equal interest LLC in May. I quit my job to build our company and the other male partner in the LLC stayed at his current place of employment. My wife and I had a little money saved to live on while we both worked to build the company. It went great at first and we grew pretty quickly. The wife of our partner was not much help and when she did manage to try, she mucked things up, either through negligence or ineptitude. Now that the company has grown substantially, they are trying to push us out. They’ve breached more than one of our bylaws and not held up to their fiduciary responsibilities. Yesterday we caught them accessing my wife’s private email in order to change passwords on some of our software to restrict our access. They’ve offered to allow us to buy them out at an unreasonable price. My question is, can we use the fact that we know they broke the law by accessing her email account as a bargaining tool legally? I’ve googled myself blue in the face trying to find an answer and have gotten nowhere. Any help would be appreciated. Thanks.
I’m sorry to hear about your difficulties.
At the end of the day, criminal activity is handled by local, state or federal authorities. If you feel illegal activity is occurring at your expense, I would recommend you file a police report and press charges. The police may, or may not, take it up — a lot of factors are at play on whether the authorities will do anything (i.e. is there clear and convincing evidence, is there a victim, are they overworked or have the time to devote to the case, etc, etc, etc).
Threatening to file a complaint, in an attempt to gain some sort of advantage, can be problematic for a lot of reasons I won’t go into now.
You really need to hire a local attorney to look at things, and help you. Otherwise things will get worse over time, to the point where the business will suffer.
Good luck. Larry.
I have a partnership which contains one commercial building, the building was damaged in a flood we hired an attorney against the insurance company, in the process my partner decided to get another attorney To represent himself, he is wanting me to sell to him for a fraction of the bldgs value now so he can get the insurance monies. He and his new lawyer are not doing anything to resolve the suit with the insurance company they are holding out on the lawsuit. My attorney said there’s nothing he can do, why can’t I suit for my percent of the insurance monies?? Let he and his lawyer suit for his percent, THEN I MIGHT SELL TO HIM BUT THE VALUE OF THE BUILDING IN THE CONDITION ITS IN. 22,000 sq ft bldg he offered me 125,000, worth a million , insurance monies from damages just under a million. He thinks I stupid I guess
I’m sorry to hear about your issue.
I get really annoyed hearing about such partners. I’m quite sure, they only want to give you a very low price for the value of the company, for you to leave it, but they themselves would be unwilling to take that same price for them to leave the company. Classic bad-faith negotiations.
My advice would be to hire a good business lawyer yourself, and make sure your partner is acting in the best interest of the company (which he is legally obligated to do). Then, you can put pressure on him to at least make decisions in furtherance of the business, versus no decisions at all.
It’s a hard one, though. You need a smart attorney to help you figure out the best way to navigate this mess.
Great read and I’m trying to figure out what to do as a small business owner. A company hired me to provide a service months ago and now claims that I’m a partner of the business.
I’ve received no pay from the company, I received unemployment benifits for the reason that I did not get paid yet. Now a settlement agreement is happening and I’ve afraid to lose the pay and the intellectual property I created as well as being threatened to not be involved in the same industry or else the company will come after me.
Sorry for the delay in responding. I don’t look at the moderated comments as often as I should.
It’s hard to give you an answer here, based on what you’re telling me. What I can say, is that it’s very difficult to argue you should be considered an owner or employee on the one hand, and a contractor on the other. You have to pick a side, and back it up with the evidence, to be able to support the position that is most favorable to you.