Breaking up is Hard to Do.
I have just completed a two and half day trial where I represented one of the owners of a small business. After working together for over ten years, the two parties split up, both professionally and personally. Although the two parties could agree that the business was over and should be dissolved, they had very different ideas as to what each should receive. My client asserted that she was a 50% owner in the business; that the business consisted of several boats and trucks; that the business generated a significant amount of profit both before and after she was forced out. The other party claimed that he was the 100% owner of the business; the boats and trucks were his own personal assets; and the business in its best years made a minimal amount of profit.
Regardless of the outcome, a large amount of attorneys fees could have been saved on both sides had the parties done some additional work in setting up and running their business. First, they did not put it in writing how much each of them owned in the business. This is required by North Carolina statutes, but the state is not going to double-check behind each business to make sure they have a written operating agreement. The document that is filed with the state for incorporation of a limited liability company will only note the names of the member/managers and incorporators. Neither of whom have to be owners.
Second, it was undisputed that the title of the boats and trucks were in the name of the individual, and not the business. However, under the North Carolina statutes, title in boats and trucks does not as a matter of law mean you are the owner. We put on evidence that the trucks and boats were purchased by the business, used for the business and sold for the business. Again, something in writing listing the large assets of the corporation would have resolved any lawsuit before it began. If they were personal assets, a written agreement loaning or renting them to the company would also have protected the individual and provided certainty to all the owners of the company.
Third, the two owners did not record in one place all the income coming in and all the expenses going out. The invoices were prepared and payment checks were recorded in accounting software, but payments made in cash were not. Expenses were also not recorded but made from checks from the business account or from cash. Non-business expenses were also made out of the business accounts complicating things even farther. All this made it difficult, if not impossible to actually value the company and determine what, if anything it was earning. Better record keeping would have gone a long way to determining what a fair amount each party should receive from the business.
–Bradley A. Coxe is a practicing attorney in Wilmington, NC with Hodges & Coxe PC who specializes in Personal Injury, Medical Malpractice, Homeowner's Associations, Contract and Real Estate disputes and all forms of Civil Litigation. Please contact him at (910) 772-1678.