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Richard - Bizlaw
Richard - Bizlaw, Attorney
Category: Business Law
Satisfied Customers: 8732
Experience:  30 years of corporate, litigation and international law
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Contract business law question: A contract was signed by 2

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Contract business law question: A contract was signed by 2 parties - 50% ownership each partner. Business sold for 10,000. Outside of the contract, the true amount of the sale was $60K with the 50K difference being paid to the seller. No contract was in place for the 50K payment. Each party was to pay 25K within an agreed upon timeframe. Only 1 buyer paid and then when the other buyer did not pay, the 1 buyer paid the entire amount to the seller of the 50K outside of the contract. Now, there is a dispute on who is technically the owner of the business and what percentage do they really own. The buyer who paid the 50K in full to purchase the business had the lease put in their name only, the liquor license in their name only and the real estate contact for sale of the business again (they want to sell it now again because of the conflict). Who is the owner of this business? The contract originally signed was a form off the internet. I doubt that even the form is correct, but each party did sign it and agree to purchase it for 10K, even though the true sales amount was 60K. They are now trying to sell the business and want to know who is the legal owner of the business? I hope that is enough information to clarify for you so you can answer the question. Thank you.
Submitted: 1 year ago.
Category: Business Law
Expert:  Richard - Bizlaw replied 1 year ago.

bizlaw :

Hello, I will try to help you. Please remember I just report or interpret the law, so the outcome may not be what you hoped for. As I understand your post, two people formed a partnership to buy a business. The contract price was $10,000 but the total price was $60,000. The partners each agreed to contribute $30,000 of cash for the total purchase price. they each paid $5,000 initially and were to pay the balance of $50,000 by each contributing $25,000. The time came and only one partner could meet his obligation so that partner paid the entire balance of $50,000. As a result partner 1 had paid in $55,000 and partner 2 only $5,000. Is my understanding correct? If it is I need to know what agreement was there with respect to the extra $25,000? Was partner 2 to repay the $25,000 and if so when? Is there a written partnership agreement?

Customer :

No contract for the additional 50K, only verbal agreement with seller. They were supposed to pay within 60 days I believe (verbal only on timeframe). Partner 2 who did not pay has no money and will never be able to pay. They did the agreement for 10K to avoid having the seller pay taxes on the additional 50K as he is very sick and was dying and needed the money. But there is no agreement except verbal for the additional 50K. Not noted on any paperwork, no partnership agreement, etc. It is one persons word vs. another. But the 1 partner did pay the entire amount when the 2nd party would not come up with the money. They were given a deadline (verbally) and could not meet it. Basically, the main partner found out they were broke, could not pay anything to satisfy the seller, so they decided to pay the entire amount outside of the contract to buy the business. Now is the 1st contract in place and if they sell the business does the partner who did not pay his share get 50% of the business if it is sells. I hope that explains in more detail.

bizlaw :

Here is where I see the situation. The partners had a partnership in which they were to contribute equally. The partnership interest will be governed by their capital accounts. The capital account of partner 1 has $55,000 initially and partner 2 has a capital account of $5,000. Based on their capital account partner 1 would own and receive 91.67% of the profits of the business and partner 2 would own and receive 8.33% of the profits of the business. If the business grew or contracted after the purchase, gains and losses would be allocated to the undistributed profits and losses based on those percentages. On a sale, any profits after payment of debts would be divided between the two 91.67% to partner 1 and 8.33% to partner 2. If I have answered all your questions, please rate my answer excellent as that is how I am compensated. If you have more questions, please let me know. If the answer was especially helpful you can provide a bonus.

Customer :

Thank you for your answer. One more question. If the business is for sale and partner 1 holds a 90% majority, can he sell the business without partner2 signature as a majority owner and just pay out of the proceeds, the percentage due partner 2. Can he pay partner No. 2 now to get him out of the business before it sells. He is ruining the business, is broke and is eating up profits. how do you get out partner 2 of the business even if the business does not sell. Can you just pay him the money he invested and get him out? I will be happy to up the amount paid to you for all you have done on this subject. Thanks again. ...Lynn

bizlaw :

As the controlling partner, partner no. 1 can sell the business without the approval of partner no. 2. If partner no. 2 agrees to a payout he can be bought out immediately. However, if he does not agree to be bought out there are still options available to partner 1. He can take partner 2 off all the bank accounts and prohibit partner 2 from taking any action that is not approved by partner 1. I do not know what you mean by taking all the profits but if partner 2 is removing money from partnership accounts that can be prevented since no distribution can be made without the approval of the majority of the partners. I think your best solution will be to get a valuation of the business. With that you can offer partner 2 the value of his interest. If he refuses you can eliminate any ongoing income from the business buy having the partnership name partner 1 the manager to manage the affairs and be paid a salary for his time. At the end of the year profits would then be distributed after setting aside whatever the partnership thinks is needed for capital reserves. In short all the financial benefits of the partnership can be withheld and only distributed yearly for the minority partner. This may force partner 2 to accept a reasonable buy out. If I have answered all your questions, please rate my answer excellent as that is how I am compensated. If you have more questions, please let me know. If the answer was especially helpful you can provide a bonus.

Customer :

Thank you for your answer. Partner No. 2 is drinking all the alcohol, ruining the atmosphere of the restaurant by yelling at employees, eating and sitting at the bar doing nothing. I would like to see Partner 1 ask him to leave by paying him his original investment and a little extra to make him go away peacefully. Partner 1 has the lease, liquor license and real estate brokerage agreement to sell the business in his name only. To get him out now.......could he lock the doors, close it down and rename the business, start it up again and just pay out whatever is the original investment to Partner 2 whether he agrees to it or not? Partner 2's wife works there also and she would need to leave with him. If he does not agree to accept his original investment and be bought out, and all proceeds are eliminated from his reach, can he stop him from coming back into the restaurant at all? Probably if the wife (25% owner) were asked to leave the position of waitress by Partner1 (is that possible?) then there would be no value to them staying on. They live on her tips. So, to get them out, partner 1 can he terminate employment of Partner 2's wife and then offer them their original investment and a little more to make them leave....Sorry for the confusing question but really, to get them both out is the goal. She makes money and should be terminated and that would get them out if that is possible. Thank you again. Lynn

bizlaw :

How is the wife a 25% owner if partner 1 put up all the money except for $5,000?

Customer :

She is 25 percent and her husband is the other 25 percent of the 6,000 (or 8 percent of the total overall business that they paid into it). I did not mean to confuse the issue, but she is a partner in the 8% that they both own.

bizlaw :

If you do not reach any agreement you can vote to formally dissolve the partnership by putting the business up for sale at an open auction at which anyone can buy. You can then purchase the restaurant using your share of the purchase price to pay most of it and the balance would be paid to partner 2 and spouse. The sale would include the lease and the name of the restaurant. The effect of this is to dissolve the partnership. You would be the new owner and the other partners would be out. I suggest you retain an attorney to take you through the process but that is how you can do it.

bizlaw :

If I have answered all your questions, please rate my answer excellent as that is how I am compensated. If you have more questions, please let me know. If the answer was especially helpful you can provide a bonus.

bizlaw :

I have to step away but will respond when I return in an hour or so.

Customer :

Thank you just want to know in the meantime if Partner 1 can terminate the wife of Partner 2.

bizlaw :

Yes he can as the majority owner.

Customer :

That is what will remove them from the business. I am interested in purchasing a majority stake in this business but will not do it unless the other partners are definitely removed. I life Partner 1 and the business is doing very well. I think terminate wife of partner 2, they will need the money very badly, offer them more than they invested to sell their portion, have them sign an agreement to sell their portion worth 6000. They are gone and now I can buy a majority in the business, keep a minority ownership of Partner 1, close it down and start all over again with a new name, proper hiring practices,etc. I am an ex HR VP and this would help start out again correctly.

bizlaw :

That is a good plan. If you buy out partner 2 there is no need to shut it down. I believe terminating the spouse will provide the necessary pressure. If you have any more questions, let me know.

bizlaw :

If you do not have any more questions, please rate my answer excellent as that is how I am compensated.

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