Assume that you and a partner own a restaurant that is organized as a limited liability company. Your partner contributed $100,000 to start the business and you contributed $50,000. However, you have always considered yourself to be an equal owner.
You are responsible for taking care of the back office paperwork and account books. Your partner is responsible for overseeing the cooking and serving staff and general restaurant operations. Both you and your partner take equal salaries. So far, there haven’t been any additional profits for distribution; however, things are just starting to heat up and it looks like there will be profits available for distribution this month.
One day during a small disagreement your partner snaps, has a mental breakdown, tells you that he quits and demands that you buy him out. You spend the rest of the business day trying to take care of day-to-day business. Upon reflection, you conclude that your relationship with your partner is irretrievably broken and it is time to part ways. However, you want to continue in the restaurant business. What should you do?
First, you should find your company book containing your Articles of Organization and Operating Agreement. If you can’t find your book, you can get a copy of your Articles of Organization at the Kentucky Secretary of State’s website.
Your Articles of Organization won’t tell you much. However, they will provide one crucial bit of information in a dispute. They will tell you whether the limited liability company is manager-managed or member-managed. If the company is manager-managed, the Articles of Organization will tell you the name of the original manager.
In a manager-managed limited liability company the manager has the authority to make most business decisions. In a member-managed limited liability company the members that own more than 50 percent have authority to make most business decisions. If your limited liability company is manager-managed and you are the manager, you likely have the authority to take such actions as hiring a restaurant manager to replace your partner who quit. Likewise, if the limited liability company is member-managed and you own over 51 percent you likely have such authority.
Nearly all the default rules for limited liability companies can be changed by the operating agreement. Thus, it is crucial that you determine whether a written operating agreement exists and secure a copy of it. If you have a written operating agreement it will likely contain several crucial bits of information.
First, most operating agreements contain the members’ percentage interests in the company. Second, most operating agreements contain directions regarding how profits and losses are to be split. Third, most operating agreements contain directions concerning when profits are to be distributed.
Finally, many operating agreements contain a section describing when and upon what terms the limited liability company and the other members may purchase another member’s interest in the company.
You must note that, while your partner may have quit as an employee and forfeited any continuing salary, he may still be a member of the company, may be entitled to vote on certain matters and may also be entitled to pro-rata distributions of profits. To avoid potential liability for conversion or oppression you should take a copy of the operating agreement and meet with your attorney before concluding that your business partner is no longer a member of the company.
As noted above, many operating agreements direct when and under what circumstances the company or the members can purchase another member’s interest. These circumstances usually include a member’s death, legal incapacity, insolvency, bankruptcy and withdrawal. It’s possible that your partner’s actions constitute a withdrawal.
If that is the case, your operating agreement may provide that your partner’s withdrawal gives you and/or the company the right to buy out his interest at a set price or price formula. If that is the case you should immediately consult with counsel. Most purchase options are only valid for 30 to 90 days from the date of the triggering event.
Remember, just because your partner quit doesn’t mean that he’s out of your business.
As reported in the Four Rivers Business Journal, February 2014