QUESTION
My business partner abandoned me and the business, and kept taking his paycheck despite not being here. I took action and removed him as an owner. Ok?
Asked on Dec 09th, 2013 on Business Law - Nevada
More details to this question:
We went into business together and he invested roughly $15k and I invested over $100k worth of equipment and supplies, as well as my reputation and experience, and we opened an auto shop. 8 months ago, he stopped coming to work. He still took out his paycheck every week, but never showed up, never called, he just basically abandoned the business. After he took out his $15k without earning it, I decided to take him off the LLC and all of the business licenses we hold. My reasoning is that he clearly doesn't want to be in business anymore, and he has received back his initial investment. No operating agreement was every drawn out, so neither of us are in violation of our actions. Now he's threatening legal action because he feels betrayed. Another angle is that his father gave him money to invest in the business, but the business only saw about $5k of roughly $50k that his father gave. His father is the driving force behind his legal threats. Can you advise me on my next move?
2 ANSWERS
R. Christopher Reade
The scenario you have laid out appears to include a number of violations of the general fiduciary duty of members and managers, as well as violation of certain procedures under Chapter 86 of the Nevada Revised Statutes which governs LLCs. There are procedures for removing a member from an LLC which do not include one member simply unilaterally deciding to kick the other out. Therefore you cannot simply kick him off of the LLC.
The greater problem will be whether the business really has the revenue/value to make litigation between the members fruitful. Absent real value (and membership fights are expensive), the cheaper alternative might be to simply call a meeting and move for dissolution of the LLC.
Answered on Dec 12th, 2013 at 3:41 PM
1 Award
It is my understanding that there is NOT an operating agreement for this LLC. You invested capital of $100,000, and the other member invested $15,000. Based on the facts you provided, you hold an 87% interest to the other member's 13% interest.
With regard to the legal issues you raise, I see the following:
1. Does Nevada law allow you to take him off of the LLC? NRS 86.331 provides that, unless otherwise provided by law, the operating agreement or the articles, a member may resign or withdraw from an LLC only after the LLC is dissolved/winds up. Therefore, you probably did not have the right to remove him from the LLC based on the facts provided.
2. Does Nevada law allow you to take him off of the business license and essentially remove him from the day to day business operations (including getting a paycheck as an employee)? NRS 86.291 provides that management of an LLC, in the absense of an operating agreement providing otherwise, is vested in the members in proportion to their capital contributions. Based on the facts you supplied, you have an 87% interest; therefore, you would be entitled to make management decisions for the LLC. Those decisions could include applying for and maintaining appropriate licenses, hiring and firing employees, etc. Following that logic, you had the right to take him off the business license and make operating decisions, such as no longer paying him as an employee if he wasn't doing the work. However, see item 1, above.
What should you do next? You could simply offer to buy his membership interest at its fair market value or have another person whom you may want as a "partner" in the business offer to buy his interest. That would be the most cost-effective solution and you would avoid significant legal fees. I would recommend that you seek legal advice in making this offer and ensuring that the transaction is properly documented. I would not recommend litigating this matter--it would be more expensive than simply resolving this through a purchase of his interest.
Best of luck.
Answered on Dec 10th, 2013 at 1:55 PM