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Dimitry K., Esq.
Dimitry K., Esq., Attorney
Category: Business Law
Satisfied Customers: 37095
Experience:  Run my own successful business/contract law practice.
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Hello, I signed on to open a fitness studio with a partner

Customer Question

Hello, I signed on to open a fitness studio with a partner (she already owns and operates an existing studio of her own) and we are supposed to open this coming Saturday. I found out today that it is not legal to open a license studio. Is this true? Also I do not want to go into business with this person as I have found out about her shady business dealings in the past. She is a scammer and I want to get out now, I want to dissolve the partnership and stay at the studio. I have paid for all the costs and buildout of the studio, paid for all the bills, etc. She has not paid for anything except for all the branding for her studio and a new website. I have not signed any legal documents and do not want to. Does she have any grounds to sue me for pulling out at the last minute?
Submitted: 1 year ago.
Category: Business Law
Expert:  Dimitry K., Esq. replied 1 year ago.
Thank you for your question. Please permit me to assist you with your concerns.

My apologies but the term 'license studio' can refer to a few potential business ventures. What specifically did you mean by that moniker? And to be clear, you do not have any direct agreement in place with this other person, correct? All your business dealings were oral and not reduced to a contract?
Customer: replied 1 year ago.

Hi Dimitry, I do not have any direct agreements in place other than 1 written agreement stating I will take care of all the financial costs and she will take care of all the intellectual property branding. We did sign a 2 year term sheet but no legal documents were signed. Sorry license studio in regards XXXXX XXXXX franchise studio but doing a licensing agreement instead.

Expert:  Dimitry K., Esq. replied 1 year ago.

Thank you for your patience, and I do appreciate the clarification.

If there is nothing directly between you and the other partner, then this is an informal partnership at best, XXXXX XXXXX not really entitle either party to obligations or direct assurances. The agreement that one will care for the IP branding and the other toward financial costs may be a bit too ambiguous and incomplete in details pertaining to the subject matter. In addition, it can be considered a preliminary agreement that is essentially an 'offer to deal' or an offer to create better terms. The issue would be different if you formally incorporated or filed for an LLP with the state--then you would have obligations to one another. Here, so far, there is no legal entity in place, and therefore there is no enforceable obligation.

She could, arguably, sue for breach of contract and detrimental reliance, but even so the onus would be on her to prove that she reasonably relied upon the promise to her detriment, and that any reasonable person would have done the same. Since a reasonable person would have created some sort of a business entity to formalize the agreement, especially since both of you appear to be somewhat sophisticated with contracting and IP work, such a glaring omission would likely doom her claim.

As for a 'license studio' being illegal, I have been scouring statutes and case law, and have not found anything that would outlaw their right to be a viable business. If you have a reference I could use, I would love to double-check it, but at least from my review I found nothing that would make this type of a business somehow against state law.

Hope that helps.

Dimitry K., Esq., Attorney
Category: Business Law
Satisfied Customers: 37095
Experience: Run my own successful business/contract law practice.
Dimitry K., Esq. and 5 other Business Law Specialists are ready to help you
Customer: replied 1 year ago.

Well she did file for the LLC for the company, we were supposed to form an S corp together. She handled all this on her end with her attorney, this was part of the intellectual property which was included in her half of things.

Expert:  Dimitry K., Esq. replied 1 year ago.
Thank you for your follow-up.

She did file, that may make a difference. Was the LLC created? Do you know if the LLC was ever submitted?
Customer: replied 1 year ago.

Yes I believe it was created and yes it was submitted. There is an articles of incorporation that her lawyer filed.

Expert:  Dimitry K., Esq. replied 1 year ago.

Then that would change my answer significantly. A creation of an LLC, especially with your advance knowledge and consent to the creation, does likewise create an enforceable duty to both (or more) of the shareholders involved. This is a fiduciary duty and a duty of loyalty both to the shareholders and the company itself. Here, once the LLC is created, the only way out is through some sort of dissolution of the LLC. You would need to look to the language to figure out how to split this company up, or if such language does not exist, both of you would have to figure out an equatable means of splitting up the assets and going separate ways.

Good luck.

Customer: replied 1 year ago.

Thank you for your informed answer. Can I offer her a payout of $2,500.00 to dissolve the partnership? What if she wants to open a studio with someone else, won't she still need the LLC?

Expert:  Dimitry K., Esq. replied 1 year ago.

You are most welcome, truly.

You can offer her any payout you deem acceptable--just please be aware that it would be upon her discretion to accept, revoke, or negotiate further. If she wants to open with someone else, currently she won't be able to since she has this existing LLC in place. Her new business cannot usually compete with the new old business as that would violate the duty of loyalty owed to the initial LLC (unless the other shareholders permit the business and allow it to compete).

Good luck.

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