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micnro5
Oct 8, 2010, 02:56 PM
When my husband and his business partner started their wood flooring business 5 years ago, the agreement was to eventually transition my husband to own the business in full. The partnership was based on my husband's skill and talent (15 years of doing floors working for other companies) and his partners finanical backing alone. Less than 9 months into the business, it had made back all the original investment (which was literally a credit line, paid in full by the end of the first year of business). Now, since the business has and is making so much money, his partner has decided not to sell. Our share holder and board meeting minutes show record of making a buy out plan so what are my husband's rights? He does 90% of the work but has no say in finances and does not want to keep working so his partner can profit off his hard work.

At our last shareholder and board meetings, the plan was to begin the buy out plan. A few weeks later, we offered to purchase 20 shares to get started and give us enough profit sharing to continue to buy him out over the next couple of years. Since the business has been such good investment, our partner now does not want to sell out at all.

Bottom line-- if my husband walks away, the business dies. His partner has zero risk, as he makes sure to pay all bills in full each month. His partner has additional income through a full time job unrelated to our business. The business is our only source of income. Is there a legal way to dissolve the business but allow my husband to continue to serve the clients he alone has built over the past five years under a different name? His partner has done very little aside from paying bills, conducting payroll and keeping track of records. He has played no part in the customer service or physical labor involved in keeping their business moving and jobs coming in. Basically, my husband does all the work while his partner rakes in 60% of the profits year after year and we want to know if there is anything we can do to change it so both partners receive appropriate compensation related to their value/contribution to the business.

By the way, our business is in Idaho.

Thanks!

Stringer
Oct 9, 2010, 11:07 AM
How explicit was the 'plan' for your husband to move forward to become an equal partner or to purchase the company? Was he detailed in putting down a date for this to happen?

Unless this was detailed (not general) then his partner has no obligation (IMHO) to sell.

As I have stated many times; unless equal ownership exists the person with less ownership is an employee.

I do not know exactly what is in your agreement/s or your by-laws. However taking existing customers is usually frowned upon. I would suggest that your husband possibly along with yourself start a new company (after you sell out the present one) and seek new customers. Unless one of the present customers seek you out I would not go to them for new business.

Good luck my friend,

Stringer

micnro5
Oct 9, 2010, 01:39 PM
Thanks for your response. Yes, specifically the meeting minutes state that we are to begin the process of buying him out at last year's meeting. The only thing we had not agreed on was the share price. The partner was under the assumption the price was the same as the one we set at each meeting in case one of them dies. But I read through the bylaws and this is NOT the selling price. The sellling price is to be negotiated separatly, with a mediator if necessary. Another thing was, this buyout plan has been a part of our business plan for a couple of years. We find it funny that he avoided discussing the buyout when shares were determined to be valued at $800. Then this last year, we agreed on the share price of $2000 and suddenly he was willing to make a plan. I don't think he anticipated us having the money to buy any shares so he threw it on the table, knowing it was unrealistic. When we called him up a couple of weeks later offering to buy 20 shares at $1000 each, he said he wouldn't do it for less than full price.

The other option I thought maybe we had was raising my husband's salary to reflect his actual position. But his partner claims doing this is not in the best interest of the business since it costs more in taxes. This may be true but if my husband is technically an "employee", shouldn't he first get a salary equivalent to his position and second, receive additional income as a share holder?

Since our bylaws say if we cannot agree we must have an arbitrator, doesn't than mean we pay someone to decide for us after hearing both sides?

Thanks again.

micnro5
Oct 9, 2010, 01:40 PM
Sorry, I responded to your post and it ended up as an answer to my question above! Please read and respond if you wish to do so.

Stringer
Oct 9, 2010, 05:25 PM
The other option I thought maybe we had was raising my husband's salary to reflect his actual position. But his partner claims doing this is not in the best interest of the business since it costs more in taxes. This may be true but if my husband is technically an "employee", shouldn't he first get a salary equivalent to his position and second, receive additional income as a share holder?

So your husband is receiving his 40% of the profits? Do you inspect the books at all? Things can be 'cooked' you know.

It would seem to be fair, that he receives his 40% and a comparable salary since he actually is the lifeblood of the company. Now getting his partner to agree to this may be another matter.

Since our bylaws say if we cannot agree we must have an arbitrator, doesn't than mean we pay someone to decide for us after hearing both sides?

Yes. Since you are the one presenting the challenge.

I would also sit down with a good business attorney Micnro and explain this all to him. Let him digest it and tell you what course of action to take. I wish you well.

It may end up with your husband requesting his partner to buy HIM out. Remember his partner may be able to find another to replace you however that may not be as easy as it seems.

Do each have first right of refusal?

And this part... The other option I thought maybe we had was raising my husband's salary to reflect his actual position. But his partner claims doing this is not in the best interest of the business since it costs more in taxes.

Even additional business will increase taxes. On a personal note, this 'partner' seems to have it pretty cushy. And any additional monies paid out will cut into his income from the business. He has his other job and he is bringing in 60% from this...

Remember in the future, never accept less than 50% in a two partner business.

May I ask, what type of incorporation do you have? A C Corp, Limited Partnership, S Corp, etc?

Stringer

micnro5
Oct 14, 2010, 10:47 AM
Last year, I had to ask for a copy of all documents. He does not offer to disclose details of anything, and just shows us the profit and loss from his laptop at our annual meeting each year.

The business is an S-Corp. And there is NO way my husband can be replaced. If he goes, the business goes under. Like you said, he is the lifeblood. Replacing the partner would be much easier and would probably not affect customers or service, though the bills might get paid differently and we might pay our employees a higher wage.

My husband and I have actually talked about selling out to him in trade for a flat monthly salary that is equivalent to the average annual income my husband has received for the last 5 years. When this has been mentioned in the past, his partner responds with "then what will motivate you to do your job well?" If anything, my husband will do his job better, knowing he is getting paid what he is worth.

Thanks for your input :)

truly1
Jan 31, 2011, 08:16 AM
micnro5 I want to caution you regarding the amount of Lawsuits there are targeting misappropriated company data. Labor and employment attorneys say that given the highly competitive nature of today's business world and a more fluid work force, corporate espionage has become a growing threat for corporations.
The culprits, they say, range from employees who steal information to start their own business and include those who leave a company to work for a competitor and want to take patented formulas, strategies or customer lists with them. I understand your frustration but before you put too much into re-starting your business be aware of any consequence from this action, the desired result more difficult to achieve than you think if your husbands partner does not agree. Good Luck