Hi Gurus and Gurets ;)
Our business has 8 rental properties meant to be held long term:
My business partner says there is a difference between exiting a business through exit strategies listed in an llc and disolving a business. Is she correct ? (doesn't seem accurate to me)
She is saying if we exit based on the exit strategies for normal cause (wanting to retire etc) then the exit strategies will be enforced but if we aren't getting along and someone wants out ; that regardless of what they exit strategies say a judge will award half of the rental properties to each 50/50 partner. I am under the impression that if the exit strategies say someone unhappy or wanting out for any reason can be bought out ; that is what will take place and the person wanting out will not have the option of taking half the properties if they choose.
We aren't fighting but just want clarification: who is right ?
She Is more correct, generally another partner can buy out the interests of another as a sale causes a reduction in valuation due to costs of sale. Either party may bring an action to dissolve the entity, but dissolution should be covered in your Operating Agreement and if not by state law. Either party, member may exit, that too is addressed in the same manner, One member may not cherry pick assets held unless there is some agreement to do so. You can search applicable laws by searching "partition of assets/property/company assets/LLC assets between members, is where I'd start.
If you're not fighting, now is the time to address these matters, amend your Operating Agreement (or put one in place).
Check too on the type of LLC you may have formed as you may need 2 members, vacancies may be addressed to fill vacancies or your LLC may be administratively dissolved.
Need to check with your attorney on these matters. Fights aren't the only issue as people drop dead, become incapacitated and sometimes go to jail, if these matters aren't addressed by agreement they likely will be by statute, so you need to figure it out and agree. :)
What do I need to do with the LLC to ensure that neither my partner or I could ever dissolve the partnership and walk away with any of the properties. I want to be fair if someone wants out ; just want other terms (buyout etc) My goal is to build the business and my concern is I wont handle executing the llc properly.
I can't type an Operating Agreement (OA) here, some provisions are long, do you have an Operating Agreement?
You can't keep a partner from stopping their participation or walking away, but if they do you can begin with administrative actions outlined in the OA.
You need to first review state law as to corporations (LLCs are under corporate entities) and use those as your beginning point in forming your agreements, by beginning point I mean the general outline as to anything must be accomplished. Actually, such insight may require an attorney and it would be best if you did see your attorney, but, let's say...,,
removal of a corporate partner or members interests will provided for in the event of any illegal act, or refusal to act or death, incapacitation will be by statute. If those arrangements are acceptable you don't need to do anything, if not, modify those terms, however you'll see things that are required which should not be modified (takes an attorney to see what might be buried in statutes that should not be modified).
It generally begins with Notice of Removal, written notice giving the time of notice of a pending administrative action, ie. 10 days notice by registered mail RRR, to the address of the member to be removed.
There may be requirements to remove powers of a member or partner, this should be accomplished at notice, restricting signature authority to bind the company or tap any bank account.
It may stipulate that a partner or officer may be represented by counsel to in any administrative action taken by other members or a board of directors.
A vote may be required by a majority or some higher requirement to remove an officer. In a corporate entity a valid special meeting must be called with certain requirements being met to call that meeting. The party to be removed may or may not attend, if they do, anything they say should be recorded in the minutes or record of that meeting.
A period of time might be required before an action to remove someone becomes effective and they may have time to object or seek judicial avenues.
There should be some method dictated as to the distribution of assets, money, that member's capital account and property.
These are the types of things you may see in statutes to remove a corporate officer or member. These aspects may be buried in verbiage which needs to be recognized as the rights of the parties, the general intent of the statutes that should not be significantly changed or modified at all.
For example, the time of notices required should not be changed at all, it reflects the intent of law relating to the rights and time frames to be observed. The requirement for a meeting and vote may not be applicable for an LLC and this requirement may be omitted, but it might be a good idea to have a written agreement for the removal of a member, a letter of resignation to show their disposition. When a business partner does not object to removal a letter of resignation is sufficient, if they object, you may need an attorney and that can be the case regardless of what might be agreed to.
Usually, you'll have leeway in actions to "winding up the business" of a member or the entity, (generally covered by statutes) will dictate how assets are to be disposed of. If no agreement exists you may end up having to auction assets and pay proceeds according to the agreed split taken as to profits.
Partners fighting can tie up property for years with attorneys and can be very expensive! This is why you just don't jump into the business bed with just anyone!
If you get in some situation where actions of any kind are necessary to force a member or corporate officer out, it will be an adversarial issue to some point, it is not a pleasant thing to fire someone and splitting the sheets in business is much like a divorce of a marriage.
Now, if there is mutual consent, it can be easier, but it's still a divorce and both will be admitting failure of their initial intentions.
One aspect of assessing value and as a basis of a buy out valuation that I can pass along is that it may be agreed that the parties agree to obtain two appraisals, each selecting their own qualified appraiser, then averaging the two values and then listing at that price or auction and there may some sell order point, where any offer or bid of 80% (or whatever) of the value, the property is to be sold, so long as liens are cleared.
If liens can't be cleared and debts paid, you may be going to bankruptcy.
After all this, I suggest you sit down and address who is to get what, terms of how to remove a partner.
The mind set: Don't look at how do I remove you in some adversarial situation, but you can talk about as if one party was hit by a bus, your new partner will be the heirs of the estate, some 19 year old nephew may not be the ideal partner and such interests need to be removed. Membership ends at death, but the interests pass on. That 19 year old may want to stay in the company, so you need to address adversarial removals.
You can outline your OA but you really need to have an attorney review the agreement, few on this site are aware of the bases to be covered, don't take legal advice off the internet. :)
Yes we have one in place from an Attorney ; just deciding on final terms ; exit strategies ; etc before each signing on the dotted line
Have a great Holliday sir
Well good! Your attorney can guide you.
One issue with investors is that they often fall in love with a property, if it is purchased in a partnership, it's not "your" property, it's an asset and assets are sold to wind up business.
Stay away from the "mine and yours" thinking, it's "ours".
Once, there was a divorce where they were splitting up a RE portfolio. They actually flipped a coin to see who got to go first. They used fake money in a way from an imaginary account, each had the same pot full. They began buying what they wanted and had to clear the liens and pay the other the half equity. If one really wanted a property had to out bid the other with their imaginary funds, when they were out of money they were done, the other could buy what was left. If property was remaining, it was to be sold and split. Then, in reality, the value was assessed and the half equity was actually due from the other. All the imaginary money game did was provide a method of getting the emotional or desired aspects to an agreement of dividing properties. A bit of a monopoly game to get past the emotional or even an emotional business attachment to a particular asset. There were 18 properties as I recall, it worked for them, they really didn't want to fight forever.
Another way is to swap equity as new properties are acquired from the portfolio, this can be agreed prior to properties being acquired, property is purchased between you and split as you do in your partnership, but the equity swap is executed only if the partnership is dissolved or one buys out the other. Before a property is acquired, there is the agreement as to who's side it will be going to with equity of the other being paid, you can take turns, decline taking it and sell and split, whatever. This is what I've done. It's not agreed because anyone plans to have disagreements and split up but because things can happen since we are mortals. Your exit strategy should be known before you buy something. :)
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