I set up a company with 3 friends. It has annual sales of $1 million. Two partners hijacked control of the bank accounts, and want to push others out. What can we do?

August 30, 2022

It’s time to stop trying to be fair, and start getting real. Before you do anything with friends — whether it’s going into business together as partners, investing in their company or even buying a property together— you need to do so with a competent lawyer, and make sure every eventuality and aspect of the company — governance, expectations, responsibilities, salaries, exit plans etc. —  is written down in a rock-solid business plan. That prevents people from claiming the business as their own, or taking control of bank accounts or freezing other partners out.

You are no longer “friends” per se. You are business partners, and there is a large amount of money at stake so all presumptions of good behavior are off the table. You all invested an equal amount and, as such, you are all equal partners. If two of those friends are not pulling their weight because they have other responsibilities, you should deal with that, but Friend A and B cannot force them to take buyouts. That’s not how business works in real life. You and your other two friends need to hire a lawyer to sort this out.

Peter Mahler, partner and business divorce specialist at Farrell Fritz, agrees. “If, as the saying goes, misery loves company, our New Jersey friend should be feeling great. I’ve seen so many stories like this one involving friends who have a great idea for a new business, form an LLC through which to operate the business which then takes off, and then find themselves at odds over who’s contributing or not contributing to the business; how the profits of the business should be divvied up and, in the more extreme cases, who is or is not a member of the LLC.”

The laws governing LLCs can vary significantly from state to state, Mahler says. “When the members don’t have a written operating agreement, the LLC will be governed by the so-called ‘default’ rules in the LLC statute of the state in which the LLC is formed.” So consult a lawyer and negotiate a fair agreement with the other members with or without the help of counsel, he adds. “Think of it as the price needed to pay for not sorting out the responsibilities and expectations of the parties in an up-front agreement.” Failing that, you will need a mediator.

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