I started business with friends who ran a night market. We organize big events every two weeks. We started an LLC as equal members, all with a 25% stake.
Friend A had the idea to do it and said he wanted us to be their partner and they wouldn’t do it without us. We all put in an equal amount of $2,000 for seed 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 could provide limited support.
Friend D was 6 months pregnant when we started and was available to help get the event off the ground, but she would soon have a baby and eventually return to her job as an independent contractor.
No operating agreement had been concluded.
““By our third event it was very clear that the event was very popular and we were bringing in a lot of money.”“
By our third event it was very clear that the event was very popular and we were bringing in a lot of money.
We were paid $1,000 each per event.
It was also around this time that friend A and friend B started pushing “buys” on friends C and D and started taking the position that we were somehow bad friends for waiting for 25% of a company we weren’t going to let’s work.
I suggested that we pay wages like any other worker, above their profit share. They didn’t seem to like that idea. Friends A and B effectively took control of the company, cut off access to bank accounts, business documents, ledgers and funds to anyone but themselves.
The event grossed over $1 million and friends C and D didn’t see a dime. Friends A and B seem to only want to talk about their initial buyout offers of $5,000 for Friend C and $8,000 for Friend D with no property.
I didn’t get into this business as a short-term investment. So far, they have not responded to calls for an operating agreement. I would like to implement one to protect my distribution share.
Am I not reasonable to expect continuous guaranteed payments of $1,000 to each owner for each event we have put on, to have wages in place for the owners who work for the LLC and retain their ownership?
I’m trying to be fair in New Jersey
It’s time to stop trying to be righteous and start being real. Before you do anything with friends – whether it’s going into business together as partners, investing in their company, or even buying real estate together – you need to do it with a competent lawyer and make sure every contingency and aspect of the company – governance, expectations , responsibilities, salaries, retirement plans, etc. — are recorded in a solid business plan. This prevents people from claiming the business as their own or taking control of bank accounts or freezing out other partners.
You are no longer “friends” per se. You are business partners and a large sum of money is at stake, so all presumptions of good behavior are off the table. You have all invested an equal amount and therefore you are all equal partners. If two of those friends aren’t pulling their weight because they have other responsibilities, you’ll have to deal with it, but Friend A and B can’t force them to make acquisitions. 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 a large sum of money is at stake, so all presumptions of good behavior are rejected.”“
Peter Mahler, partner and corporate divorce specialist at Farrell Fritz, agrees. “If, as the saying goes, misery loves company, our friend from New Jersey should be feeling great. I’ve seen so many stories like this 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 contributes or doesn’t contribute to the business ; how the profits of the business should be shared and, in the most extreme cases, who is or is not a member of the LLC.”
Laws governing LLCs can vary significantly from state to state, Mahler says. “When the members do not 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 settlement with the other members with or without the help of counsel, he adds. “Think of it as the price to pay for not settling the responsibilities and expectations of the parties in an advance agreement.” Otherwise, you will need a mediator.
The ultimate – but not always avoidable – goal is to avoid costly 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 deal and put aside the baggage of being a “good friend” or a “bad friend.” The gloves are already off and your only goal is to find a way forward to share the profits equally while agreeing on wages for full-time workers. You may decide to dissolve the LLC, but as equal partners payments will still need to be made.
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