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  1. #1

    Default Determining Partners' Equity Percentage in a Business

    My question involves business law in the state of:
    CT

    Hi, guys.
    Bit of a sticky issue here.
    I m trying to determine my partner's equity percentage of an LLC.
    I have spoken to attorneys but have gotten different answers.
    So I need some help.
    A number of years ago, another person and I decided to form an LLC. This LLC was formed for then current and any future business ventures with this person. (Person was a romantic partner also at that time - no we were not married as I'm told that makes a difference)

    The LLC was formed under my name only.
    No partnership agreement was done.
    We purchased an investment property under this LLC.
    Total investment was 38750. 5500 from partner, 12000 from me, and a loan from the former owners for 21250 which was recorded as a mortgage with monthly payments 30 year amortization 8 year balloon.
    Even though partner was not listed on the LLC, taxes were done as a partnership, and profits and losses we're distributed via k1 on a 50/50 basis on taxes.
    In actuality, the investment paid for itself 100 percent of the time, and upgrades ans repairs such as appliances were either paid for by income from the property or purchased by me. The partner did not contribute further.

    Day to day operations such as maintenance or repairs were performed 80 percent by me.

    Actual monthly profits were controlled and managed by me until November.
    The profits paid our living expenses. Bills etc.

    In November, the partner and I split. I started to give 50 percent of profits to the partner separately.

    Partner had a huge fit that they were not on the LLC, so I filed an annual report that listed them.

    Partner now wants to walk away and no longer have anything to do with the business.
    Wants to sell the property and dissolve the LLC.

    I do not want to sell.

    So that leaves me one option. Buy them out.

    But I need to determine thier stake in the property.
    I have been told that regardless of their stake in the business, it's their contribution to the property that governs their percentage for sale/buyout purposes.

    If that's the case, I'm not sure if it would be roughly 1/3, which would be thier 5500 compared to my 12000 initial investment.

    OR

    Since upon buyout I would be shouldering the baloon payment from the former owners, which was part of our initial investment, if their percentage would reflect their investment of 5500 compared to my 12000 + sole responsibility of payback of the 21250 which was lended. Which would equate to the partner having roughly a 14 percent stake.

    OR

    Does none of it matter, and partner gets 50 percent no matter what, regardless of their initial contribution?

    I went to 3 attorneys and each one said something different. Which is how I was given these 3 different scenarios.

    I'm open to each one, I just need guidance as to which one is accurate.

  2. #2
    Join Date
    Oct 2014
    Posts
    8,238

    Default Re: Determining Partners Equity Percentage

    The reality is that it depends on the terms of your agreement. And the problem is that you did not get an agreement in writing at the start of this that specified exactly how this venture was going to work. There were all kinds of ways that this could be structured. It is possible, for example to have an arrangement where the split of capital and the split of profits are not the same (though that is not the most common way such investments are done). I don’t know the details of what you and your partner would say was the deal you made. It may be that you didn't really discuss it much. It may also be that you each have different recollections of what the agreement was.

    It is not unusual for the percentage ownership in a venture to be based on the relative amounts of money and property that were contributed to the venture. You contributed $12,000 and he contributed $5,500 for a total contribution of $17,500. So if the ownership was split based on contributions, he would have 31.43% of it and you would have 68.57% of it. You might argue that you should have even more of the venture since you did most of the work in running it. The problem is, though, that you have been splitting the income 50% each and my guess is that you reported on the tax returns that he owned 50% of both the income and the capital. That is evidence that he can use to support a claim that he owns 50% of the venture.

    What a court would decide is impossible to guess. It would matter what each of you testified as to what the deal was and what evidence you each presented to support what the deal was, which might include more than just what was contributed and what the profit split was. The fact that you are getting different answers from different attorneys tells you that there is no clear cut answer to give you and the result in court is simply not going to be easily predictable. That's the problem you run into when you don't get a well drafted partnership agreement that spells everything out in detail. Even when your partners are family, friends, or lovers you need to treat business ventures with them like you would with a stranger and get everything in writing and then make sure everyone sticks to that agreement. So should you ever go into business with anyone else in the future, keep that in mind and don't repeat that mistake.

    There is also the issue of figuring out exactly what the LLC is worth.

    If you can, negotiate a deal on the split with your ex-partner. You might try offering him, say, 30% of the value of the LLC (or whatever you think his share is) and see if he’ll take it. If you say you can have a check for that ready immediately, the lure of getting the money right now might get him to take it. If he won't take it, then you get into the back and forth of negotiating and hopefully you can arrive at an agreement. If you do, make sure you get a signed agreement from him that the payment is in full satisfaction of his interests in the investment and that he waives any future claim to anything from the business. See a business attorney to get that drafted, and make sure he signs it at the same time you give him the check.

  3. #3
    Join Date
    May 2017
    Location
    Florida
    Posts
    355

    Default Re: Determining Partners Equity Percentage

    Excellent analysis. Negotiation is far cheaper than litigation. I'm convinced that the ownership interest of the other person is some place between 31.43% (thanks for doing that arithmetic, TM) and 50%. To get the 31.43% the OP will likely end up litigating away a portion of the value s/he is attempting to retain. At 50% s/he is likely leaving something on the table. Give the amount invested by the two parties, a 60/40 split that could avoid litigation may be in the best interest of both parties.

  4. #4
    Join Date
    Mar 2013
    Posts
    18,340

    Default Re: Determining Partners Equity Percentage

    I m trying to determine my partner's equity percentage of an LLC.
    It will be whatever it takes to get you out from under this arrangement without spending barrels full of money on attorney fees if your partner decides to litigate.

    All you can do is pick a number ($____) and see if your partner can live with it.

    Or ask your partner for a number ($____)and see if you can live with it.

    All the advice in the world is not going to resolve anything until one you puts a number out there.

  5. #5
    Join Date
    Oct 2006
    Posts
    16,474

    Default Re: Determining Partners Equity Percentage

    Your partner paid taxes on 50% of the profit and absorbed (on a tax basis) 50% of the losses. Those Schedule K1s are evidence of a 50/50 ownership of the property.

    I do not have any idea how much equity you have in the property, but you only paid 38750.00 for it so it cannot be a huge amount. Let's use 38750.00 as your equity amount, just for an example. 50% of that would be 19375.00. 31.43% would be 12179.00. The difference between the two is 7196.00. Its quite possible that you would spend more on legal fees than 7196.00 and quite possible that you would lose, therefore wasting that money, because she has the Schedule K1s that show that she has been treated as a 50% owner.

    If your equity is less than 38750.00 it makes it even more likely that it would be a waste of money to litigate it. I agree with the others that negotiation is your best option, but if I am right that the equity is 38750.00 or less, there isn't much point in fighting it if she insists on 50%

  6. #6

    Default Re: Determining Partners Equity Percentage

    Quote Quoting llworking
    View Post
    Your partner paid taxes on 50% of the profit and absorbed (on a tax basis) 50% of the losses. Those Schedule K1s are evidence of a 50/50 ownership of the property.

    I do not have any idea how much equity you have in the property, but you only paid 38750.00 for it so it cannot be a huge amount. Let's use 38750.00 as your equity amount, just for an example. 50% of that would be 19375.00. 31.43% would be 12179.00. The difference between the two is 7196.00. Its quite possible that you would spend more on legal fees than 7196.00 and quite possible that you would lose, therefore wasting that money, because she has the Schedule K1s that show that she has been treated as a 50% owner.

    If your equity is less than 38750.00 it makes it even more likely that it would be a waste of money to litigate it. I agree with the others that negotiation is your best option, but if I am right that the equity is 38750.00 or less, there isn't much point in fighting it if she insists on 50%
    The actual equity is less. More like 20k. Not a lot. So we are talking small numbers here.
    Remember, a large portion of that investment was loaned by the sellers, and it's a loan I'll be assuming solely after this.
    That's why 2 of the attorneys came up with what they did.
    However, I'm fine with 50 percent. I just want it done. I can pick up the pieces after.

  7. #7
    Join Date
    Oct 2006
    Posts
    16,474

    Default Re: Determining Partners Equity Percentage

    Quote Quoting zx7ninja
    View Post
    The actual equity is less. More like 20k. Not a lot. So we are talking small numbers here.
    Remember, a large portion of that investment was loaned by the sellers, and it's a loan I'll be assuming solely after this.
    That's why 2 of the attorneys came up with what they did.
    However, I'm fine with 50 percent. I just want it done. I can pick up the pieces after.
    Yeah you are talking about the difference between about 8260 and 10000. That is absolutely not worth litigating over. You can offer her the 8200.00 and see what she says. Lets hope that she is not the kind of person that doesn't understand that her value in the property is just its equity.

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