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Maverick
Maverick, Attorney
Category: Business Law
Satisfied Customers: 6423
Experience:  20 years of professional experience
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Partner in LLC has periodically used business funds for personal

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Partner in LLC has periodically used business funds for personal expenses - groceries, gas, haircut, etc. Other partner has confronted the issue only to be rebuffed by said partner justifying the expenses as reimbursement for undocumented personal retainer he donated or applied to pay corp tax bill. This not only seems like extremely messy accounting but also makes our corp. veil rather nonexistent. What are some consequences and remedies? Thanks.

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How many members are there in the LLC?

What options does the LLC operating agreement have to vote him out as an officer of the LLC?

Customer: replied 6 years ago.
We are two, 50/50 partners. I have gone through a variety of scenarios internally and can only come up with something like sharing the brand we have built and suggest to operate completely independent of another whilst maintaining/preserving our brand. Division of primary sales channel and accounting then seem to me the biggest challenges.

This is not an easy situation to fix because when you have a 50-50 deadlock between LLC members, you have now go to court and apply for dissolution of the LLC if the two of you cannot come to a workable agreement on your own as to how to proceed. The LLC can also sue the other member for misappropriating funds to recoup them. These are the remedies available.

 

The consequences are that the honest member will be cheated out of his funds and have to sue the other member for embezzlement if there is proof of that and also, as you say, the possibility to losing limited liability protection.

 

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Customer: replied 6 years ago.
OK - I get the obvious about feeling cheated from funds but when other partner argues that the funds balance out this argument becomes petty. In my opinion, the amounts are insignificant compared to the decisions, justification, accounting, and potential consequences thereof. For instance, unforeseen litigation which could possibly result in plaintiffs coming after my personal assets which are substantial compared to his? How liable do my personal assets become as a result of these types of commingling decisions?

In Florida, courts require a showing of three factors in order to pierce the corporate veil:

1) The corporation is dominated and controlled by its shareholder(s) in such a way that it is merely an "alter ego" used for the shareholders' benefit,
2) Some sort of improper conduct in either the formation or the use of the corporate form, and
3) The improper conduct imposes an injury on the claimant.

A critical issue in determining whether the corporate veil will be pierced for imposition of personal liability is whether the corporate entity was operated for an improper purpose such as:

1) to defraud creditors,
2) to evade existing obligations,
3) to conceal a crime

So, if he is just commingling assets to cheat you, personal liability exposure is not such a big concern. However, if he is doing this to evade obligations with respect to third parties, those third parties will have standing to disregard the corporate structure.

 

 

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