Tag Archives: corporation

My business partner is stealing from my company? What can I do?

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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

blog@mckeeoffice.com

 

McKee Law Office

Philadelphia, Pennsylvania

http://www.MckeeOffice.com

LLC or Nonprofit?

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I received the following question by email:


I have a business idea.  I am trying to figure out whether I should set up as an LLC or a non-profit.  I want to setup a wildlife preserve while producing organic food near my home.  I am concerned about public liability, tax considerations, and a safety net for myself and my family.

 

This was my response:

 Fortunately, for you most non-profits are incorporated as corporations.  I am assuming that you would want to receive tax exemptions from the IRS; if so, then your non-profit will need to be incorporated.  A corporation achieves all the goals you listed, as does the LLC (mostly).  The major difference between an LLC and a nonprofit corporation is that as an “owner” of a non-profit, you are technically holding the funds for the public.  Like a trustee holds money for a child.  All the donations and in-kinds gifts that you receive belong to the public only.  So, you are not as free to use the funds as you would if your business was an LLC.  Thus, you will be open to more scrutiny; in fact, even your tax returns (if you have to file them) will be open to the public. 

 On the other hand, there are many grant and funding opportunities for farming and environmental work.  This is a great benefit if setting up your business is expensive.

 The choice is yours.  I encourage you to talk to your business lawyer about it. 

What should you ask your attorney?  I suggest:

1-      Find a small business attorney.  Unless your business grosses $2 million or you have over 20 employees, your business’ legal needs are very unique.  You need an attorney that is familiar with those issues and opportunities.

2-      Identify your key concerns. (liability, taxes, manageable paperwork)  Your key concerns will drive your entity-choice decision.

3-      Discuss your start-up capital and cash-flow plans for the business.  If you plan to run a loss, then you may use this to lower your tax bill.

4-      Discuss your business philosophy.  Are you a risk-taker or risk-adverse?  You need an attorney whose philosophy matches yours.

5-      Discuss billing arrangements.  You need predictable, manageable bills.  Try to find an attorney who offers fixed fee billing instead of hourly billing; or, find an attorney who will give you a budget prior to beginning your work.

6-      Indentify your communication needs.  Be realistic with yourself.  Will you need to talk to your attorney every 24 hours or do you only want to “talk” with your attorney by email.  Whatever communication level you require, find an attorney who can provide that level.

 Your idea sounds exciting.  I wish you luck.

 

Hershey Could Go To Jail Because It’s New Product Looks Like Cocaine

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Earlier this week, Hershey released its new product, Ice Breakers Pacs, which are dissolvable pouches filled with powdered mint and sweetener, and are meant to dissolve on the tongue like breath strips. The pouches are blue or orange that, according to Family Court Judge Lori Dumas Brooks , looks uncannily like tiny heat-sealed bags of cocaine, crack, heroin or any other powdered drug. Jill Porter | Mint or drug: Is Hershey’s cracked? | Philadelphia Daily News | 11/30/2007

Did Hershey breaks any rules by packaging a product to look like an illegal controlled substance, even though the product is not an illegal drug? Yes, actually, it is a federal and state crime to distribute a substance labeled to resemble the likeness of a controlled substance. The statute calls this product a counterfeit controlled substance. See Section 780-102(b) of the Pennsylvania Statute.

Of course, the statute lists specific steps to proving whether Hershey intentionally packaged the product to look like the controlled substance, heroin or cocaine. For example, perhaps cocaine is only sold in colored, heat-sealed bags in Philadelphia, but is not sold in this manner across the state. The case is not open and shut. However, an interesting question is, how does a company go to jail? The chief executives responsible for the company’s actions go to jail on behalf of the company. So, if the state or the federal government were successful in proving that Hershey violated the Counterfeit Controlled Substance Act, then the chief executives could go the jail.

Is that the end of the story? No. For every criminal action, the victims of a crime can also sue the perpetrator in civil court for money damages. In this case, the victims of Hershey’s criminal actions are Hershey’s shareholders.

The shareholders of Hershey could bring a civil suit against the company for deliberately harming the corporation. This is a new legal trend; however, courts are beginning to recognize shareholders as creditors to compensate the shareholder for their losses. A suit such as this usually only lies when the company is insolvent; but it is only a matter of time before the courts recognize this cause of action, when the company mislead or deceived the shareholders. See Sons of Gwalia, Federal Court of Appeals 1305 (15 September 2005).

In addition, the shareholders could sue Hershey for not prosecuting the executives for wrongdoing. This is called a Shareholder Derivative Actions. The shareholders could also sue the company’s directors personally and directly for breach of fiduciary duty.

It will be interesting to watch this situation. Will the prosecutors investigate Hershey or will Hershey voluntarily discontinue the product?

What can you, as a business owner, learn from Hershey?

You must resist the urge to capture the lucrative illicit drug-using market by marketing a counterfeit-drug product. While you may sell many products, the revenue will not outweigh the costs.