In today’s Freedom Friday blog and email newsletter, we are getting ready for the Christmas season. Next Wednesday night is Christmas Eve, and next Thursday (one week from yesterday) is Christmas Day. From all of us at Liberty Legal Solutions, LLC, have a Merry Christmas! So, in considering what we would talk about in the Christmas edition of the Freedom Friday blog, I thought long and hard about what we would talk about, and I came up with a theme, “The Gift that Keeps on Giving.” Everyone loves Christmas gifts, but some gifts are the ones that keep on giving, and in the business and legal contexts, those are problems that continue to fester, especially in a small business. Probably the biggest “gift that keeps on giving” is the problem business partner situation. Yep, that can be a real a problem, what to do about a business partner (or fellow LLC member, etc.) that vanishes or stops showing up but continues their ownership rights, opinions, distributions, etc.
The first thing I will ask a prospective client when they come to me regarding this kind of issue is what does the operating agreement (in the case of an LLC) say about it. Unfortunately, many LLC operating agreements, especially when they were not drafted by an attorney, do not thoroughly address this matter, and do not provide a real mechanism to resolve disputes. However, if you have a bona fide LLC operating agreement, you should look at what it says about the duties and responsibilities of the members; decision-making (manager-managed vs. member managed, quorum, tie breakers, etc.); events of default or dissociation such as non-participation, failure to perform, or misconduct; buy-sell provisions; and deadlock provisions. All of these topics should provide a starting place at how to resolve an issue with a problem business partner in your LLC. Once you’ve considered everything in your operating agreement, here are five (5) steps to resolving issues with a problem business partner:
1. Document Everything
The first step to resolve an issue with a problem business partner is to document everything. If you are the managing member of the LLC, or the leading business partner who is not the one causing the problem, send a professional letter to the problem business partner (or LLC member) documenting the non-participation and connect the issues with the operating agreement, if you have one. At this stage, you also need to save all the emails, text messages, board chat logs, meeting notices and minutes thereof, and any other proof of the problem.
2. Stabilize the Business
The second step to resolve an issue with a problem business partner is to stabilize the business. If your LLC is a manager-managed LLC, use that as approach to stabilize the business. If you are member-managed and have tie-breaking procedures, then you can do the same. Otherwise, if you are member-managed, call a formal meeting of the members with an agenda which will advance key business actions like banking authority, vendor approvals, and payroll. Keep minutes of any members’ meeting.
3. Propose a Business Resolution
The third step to resolve an issue with a problem business partner is to propose a business resolution of the matter before resorting to a legal resolution of the matter. Propose a clean buyout plan including a valuation method (either CPA or appraisal), payment schedule, release of claims, non-disparagement, etc. This is the reasonable thing to do before resorting to legal action.
4. Manage the Money
The fourth step to resolve an issue with a problem business partner is to manage the money and control the paper trail of the business’s finances. You should review, and if necessary, adjust distributions according to the operating agreement. Non-participation should not entitle anyone to special treatment, especially if they are obstruction the operations of the business.
5. Escalate to a Legal Resolution
The fifth step to resolve an issue with a problem business partner is to escalate to a legal resolution. It is wise to get an attorney involved at step one, but if you haven’t yet, you need to get an attorney involved and have him or her send a demand letter with proposed buyout terms to the problem business partner. The longer that problem business partner continues in your business the more of a problem he or she will be. The problem business partner is the gift that keeps on giving. Getting an attorney involved will help steer you with next steps in a legal direction, including possible legal action against the problem business partner to protect your business.
Thinking about starting a small business? Or maybe your small business is having issues with contracts, leases, business partners, collection issues, or experiencing other barriers to growth? Please contact me at Jonathan@libertylegalok.com to schedule a FREE strategy session.
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