Let’s take the restaurant business for example. Assume that you are the person with the talent and brains behind the operation. You were a chef in a famous restaurant in New York City. You decided to move to St. Petersburg, Florida and have talked to your college fraternity brother, who is now a doctor and doing well, about helping you fund the restaurant business. You have the knowledge, you have saved some money, and your doctor friend is looking to diversify his investments. He scratches his head at today’s “market” and thinks that perhaps putting money into a business with a dear friend he has known for many, many years has got to be a better investment. Your high school best friend’s father has retired from the construction business, the business had done well and he too has substantial money to invest.
You sit together over lunch one day and map out a general idea. You will be the one running the day to day business, your fraternity brother will invest a few hundred thousand dollars and your other childhood friend’s father will invest a few more hundred thousand dollars. You generally talk about splitting the profits 3 ways, but no one articulates how you will be compensated for your wages, whether profits will be in the form of distributions or in the form of loans or some other sophisticated manner. You’re confident with going forward on a handshake because you have known each other most of your life, you are all almost like family to each other, and wasting time and money on a lawyer drafting a bunch of multi page documents just seems counterproductive to you all.
So, you dive right in. You work hard and you’re finally able to take a salary after about 6 months of work and a year and a half later, you are on the way to great success. Your fraternity brother has visited the restaurant often, commenting at how well things are doing as well as your high school friend and his father. They see the many customers coming in the door and they wonder why they are not getting any money yet.
You, on the other hand, are still trying to recover from the startup costs. Your long term friends become disgruntled and you all can’t seem to get on the same page.
What to do. Unfortunately, the right time to do something was when you first opened the business, to set forth an agreement that specifically addresses future concerns, some of which I will identify now:
- How are you compensated for “sweat equity”?
- What is a fair wage for you?
- At what point should distributions be given?
- What are the parties voting rights on all of these issues and many others?
- How have your capital contributions been booked? Do you agree with it?
- Are your other partners receiving K1’s with negative tax consequences without receiving any money from the business?
- Your friend’s father is getting older and he’d like to sell his interest in the business, especially since the present dispute has arisen. Is there a right to sell? Must certain members vote to approve the sale? Must the sale first be offered to the other members? Are there any restrictions on the sale? Finally, how in the world do you decide the purchase price?
Please do not hesitate to contact our Firm to discuss your options so that you can make the right decisions up front, lay the ground work for your future and avoid what we have described above.
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