I received this question by email:
I am 50% owner in an S-corp. I am the treasurer and Secretary but my partner is trying to run the business like she is the sole owner. We no longer have a civilized relationship. The business is 1 year old and I have never gotten a penny from it for myself. My partner is overdrawing the bank account every month and refusing to pay the bills on time. I believe the money from the business is going to her personal account, but she told me that the business is broke. I can prove the business made money in the first 3 months of operation before she took over the finances.
My questions are:
1) Can I buy my partner out if she is unwilling to sell?
2) How do I determine the value of the business?
3) Do I have a case for embezzlement?
This was my answer:
What you are talking about is a business divorce. Business divorces are similar to marital divorces. The partners will add all the assets and account receivables, then subtract the debts and retained equity. This final amount–’profit’–is split based on each partner’s share of the business. Business are governed by either their governing documents (partnership agreement or an operating agreement) or by state statute. If your business does not have any governing documents, then the state statute tells you how to divide your business. So, based on the state statute (the Pennsylvania Corporation Act), you can buy out your partner, even if she is unwilling to sell. The same statute authorizes a court to liquidate any business at the request of its shareholders, even if the other shareholders do not want to liquidate.
There are 3 standard formulas for determining the value of your business–this process is called business valuation. It is completed by an accountant, a forensic accountant, or a certified public account. It’s a complicated process, because it involves a projection about the business’ future profit.
Yes, you can sue her for “embezzlement”. Technically, embezzlement is a crime, so you cannot sue her for committing a crime. However, like most crimes, the criminal’s underlying actions usually violate criminal law and civil law at the same time. So, in this case, you can sue her for a “breach of fiduciary duty”. A business fiduciary duty, in Pennsylvania, requires a director to act honestly and in good faith to achieve the best interests for the company. An example of a breach of this fiduciary duty is when a director uses company property for his or her personal profit, without the informed consent of the other directors. In addition to suing her for breach of fiduciary duty, if she deliberately ran the business into the ground, then you can also sue her for the loss by filing a derivative action against her on the business’ behalf.
In short, you have a couple of options. I recommend hiring an attorney so that you and your partners can separate any emotional attachment from this business transaction. Your attorney can stand as a wall between you and your partner now that the relationship has broken down.
Do you a legal question about contracts? We offer free consultations on this and other issues. Chat, live and privately, online with an attorney every Monday through Friday from 8 a.m. to 8 p.m.
Sharmil McKee
Business Lawyer
McKee Law Office
Philadelphia, Pennsylvania
