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Loren
Loren, Attorney
Category: Business Law
Satisfied Customers: 20240
Experience:  30 years experience representing clients .
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I have an S-corp (45% owner). My biz partner (55% owner) set

Customer Question

I have an S-corp (45% owner). My biz partner (55% owner) set up an identical, competing LLC in his name and starting taking work for himself. We act as a subcontractor to install wall pads for pad manufacturers. We do not have a written operating agreement. We have been in business since 5/2008. The reason he set up a competing biz is to not split profits and install pads by himself. He also lied to me this summer and told me that our major "customer" is going to hire internally to install pads instead of subcontracting to us. He used that "excuse/reason" to help facilitate the dissolution process of our S-corp. Is what he has done illegal?
Submitted: 3 years ago.
Category: Business Law
Expert:  Loren replied 3 years ago.
Maybe. If your partner is an officer or director in the S corp he has a fiduciary duty to the corporation to deal in good faith and to not divert business opportunities of the corporation. A director is also prohibited from doing competing business without disclosing that to the board. You can sue him for your lost profits.

Edited by LawGuy on 1/3/2011 at 2:22 AM EST
Customer: replied 3 years ago.
Okay. He is the President. He more or less "runs the show." Here is a follow-up question: If I sued him for lost profits, what is the legal process for finding out how much business he "diverted?"
Expert:  Loren replied 3 years ago.
After you filed and served your complaint, there is a discovery process in which you would have an opportunity to subpoena accounts, correspondence and other records relevant to your claim. Also you would be able to depose various parties with knowledge of the dealings between your partner and the customer. You would also be able to investigate what other customers he has approached for the purpose of diverting company business to himself. Take action soon before he completely transfers the business to his own company.
Customer: replied 3 years ago.
Okay thank you. So, even if there is no "operating agreement" or exit agreement, in your opinion, I still have a good case to sue him?
Expert:  Loren replied 3 years ago.
Absolutely.
Customer: replied 3 years ago.
Sorry...one more: even if he is majority owner at 55%?
Expert:  Loren replied 3 years ago.
Yes. It is not his position as shareholder which makes him in breach of his fiduciary duties, it is the fact that he is doing them while an officer of the corporation.
Expert:  Loren replied 3 years ago.
Did you have any follow up questions? If i have answered your questions, please remember to click ACCEPT.
Customer: replied 3 years ago.
Some additional thoughts:

Since approximately mid-June 2010, my partner has maintained that our customer is hiring internally starting in 2011. This would mean that our main revenue stream is essentially eliminated. Since that was supposedly the case, we started "planning" on dissolving our company at the end of 2010 / beginning of 2011. As I stated previously, he was in-fact lying to me and had started his own LLC. I no longer believe the "customer" is hiring internally.

Knowing this, would this change your opinion?
Expert:  Loren replied 3 years ago.
It is irrelevant to his diversion of company business which is the basis for your claim.
Expert:  Loren replied 3 years ago.
Did you have any more follow up questions before you Accept?
Customer: replied 3 years ago.
Okay...separate kind of question:

I was in a rental lease for 1 year and we were going to renew for another year. However, due to a change in circumstances and a job offer, I am moving out of state. We did not ever sign a new lease, but did verbally tell the landlord that we would stay another year. I also replied to an email once saying our intention was to sign another 12-month lease.

Our landlord never followed up and we gave him a 30-day notice (the lease said 60-day). What is your opinion on this? Do we owe another month's rent? Since we never re-signed, are we not liable to give him a 60-day notice?

I promise I will Accept your answer and pay you the $50! (I also just wanted to make sure I didn't have any follow-up questions related to my business partner)
Expert:  Loren replied 3 years ago.
I have read your lease question and I promise I will answer the question after you have Accepted the S Corp/LLC question.
Loren, Attorney
Category: Business Law
Satisfied Customers: 20240
Experience: 30 years experience representing clients .
Loren and 11 other Business Law Specialists are ready to help you
Expert:  Loren replied 3 years ago.
Thanks. The deal with the lease is that once it expired and was not renewed in writing, the tenancy converted. To month to month. To terminate a month-to-month lease, State law requires that written notice of intent to terminate must be given at least ten days before the last day of the rental month which has already been paid, that is, eleven days prior to the next rental payment due date. The statute can be found at Section 13-40-107 C.R.S.

Edited by LawGuy on 1/5/2011 at 9:57 PM EST
Customer: replied 3 years ago.
Okay...so my business partner is being difficult, as I suspected he would. Any chance you can point me in the direction of a particular Colorado state statute or law related to this "case?" If you can, I will provide a bonus tip or whatever it is.
Thanks.
Expert:  Loren replied 3 years ago.
The following link is to an article which provides a good discussion of common law fiduciary duties owed by corporate officers and directors. It should provide you a good overview on the subject: http://www.abanet.org/buslaw/newsletter/0003/materials/tip3.pdf

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