llc no operating agrement, fall out with partners

11 Replies

Here are the ridiculous facts.

1) we bought a building with "friends" to be rehabbed and turned into a short term rental. We drafted an operating agreement  after I formed the llc. We discussed and they seemed ok with it but never signed. The property has not been transferred to the llc.

2) we all discussed I would run the construction project and would get paid for my time. The construction has been going on since last august. It is a 330K project. There has been no discussion about my payment.

3) they have done very little work, have been very bad at communicating and they stopped contributing so we had to actually borrow money to finish the last stage of project.

4) we drafted a buy out agreement and they countered and we accepted. They have since change their mind. They said that their accountant needs 6 to 12 months to "value" the business. She is trying to squeeze us hard. On a side note: they wont give us their accountants information and she is filing for the llc. Yep its crazy.

5) My husband I will be in my wages (whatever that should be and an extra 100k) The total investment (including the mortgage balance will be about 850K and our share will be 500k of that). I realize that we should be entitled to a bigger share of the profits as the Washington state regs indicate.

But here are my questions:

If they force a partition, would the judge consider all our extra costs and hours/contribution (its documented) and let us buy their share? Or will it be a forced sale. I don't want to lose this building.

Should we try to get this property into the llc to avoid this possibility? If we can strike a deal with them, we will want the property in our names to refiance so I am nervous about that. I realize that I will need their consent and I might be able to sell them on this for"liability" purposes.

We may be able to sell them on an operating agreement (which I feel disingenuous as I don't want to be partners) but I need to be made the sole manager.

Lots of issues here. Still hoping for a buy out but I am concerned.

You need to hire an attorney and find out what your rights and options are.    The only ship that won't sail is a partnership.    Until everything was signed, nothing should have happened.    Good luck, sounds like a mess. 

I second Brian in the thought that you should get a consultation from an attorney. I recently spoke to one who was very helpful to me. If you'd like a referral, PM me and I can send you the info.

Good luck! 

Love your " friends"! sorry that they are not really friends as the other posted get an attorney and remember this is business and not a friendship at this point. This was their choice not yours for choosing the path. If you are in Pa I have a great attorney she is a sweet heart but when she needs to be a "B" she has no problem "FU" to your opponent. Let me know and good luck. As you know now no partners you can do it yourself

You do not need an attorney.

You need a specific real estate litigation attorney that focuses on business creation, partnerships, and entities.

You will need to pay money to unravel this mess. People have fuzzy memories about agreements and get funny about money down the line. Friends, family, etc. you put it in writing period.

No legal advice given.   

Whose name is the property in now?  That is who owns it regardless of any potential LLCs.  If their name is on it with you, then they have rights.  Do you have a loan on it? Whose names are on the loan?

The state has default language for business entities ... which you probably have a 'General Partnership' by default. (You'll have a tough time getting it in an LLC if you already have a loan on it.) Your attorney can help you with the entity structure of your relationship and how to best untangle it.

Make sure all expenses are well documented.  You probably won't recover time invested but your $'s should be reimbursed at point of sale. Good luck!  Don't run from the experience, learn from it - always get things in writing FIRST, then proceed!

Not legal advise!

We are all on the loan. Tenants in common. We have not transferred property to llc. We have heard that banks aren't calling loans for this as interest rates are so low. But that is no guarantee. So I'm not sure what we will or can do.

We are actually attorneys (we don't practice real estate or business law and are smart enough not to represent ourselves).  To add, these were not just business partners, We trusted these people to have our children if we died, so we trusted them to be acceptable partners. 

Although it appears that we should have demanded the operating agreement that we have them when we started (it was totally neutral and they had no reason not to sign but laziness) it is actually not the agreement I would find workable now. In fact, on a lot of issues, state law is better for is than the agreement we sent them months ago. If we agree to another operating agreement it will be much different.  

Our biggest obstacle is the buy out stuff. (And the property not in the llc). We will continue to try to buy them out. I was just trying to figure out the worst case scenario if they want to torture us.

We don't just need to "speak to a lawyer". This is nuanced. We have already consulted counsel for the buy out contract we proposed but the facts have changed. He was a real estate attorney.

 I suspect, as someone mentioned above, we need a very specialized attorney that practices business and real estate law as well as litigation.

Paying attorney will be money well spent if we have to go that route. But determining the legal issues is helpful for us right now.

Thanks for the advice.

@Kelly B.

You skipped many steps in the process already and now you're asking what a judge and/or jury would do/consider.  PLEASE, learn from your mistakes.  No one here can help you.  You failed to address all the necessary details when forming your business relationship with your friends...don't make that same mistake again. Seek legal counsel immediately. No one here can tell you what a court will find or consider, and perhaps competent counsel can keep you from ever having to go to court.

It's okay, even doctors get sick.

If you all were that close, what is it that they really want? No one person in tenants in common can direct an accountant to act for other owners. Where did she come from? And I doubt the accountant is really the mastermind, she has no authority.

If you didn't have an Operating Agreement you don't have a valid LLC, nothing but the filing. Who was the registered agent? Consider dissolving the LLC and go with state law as you mentioned.

In a partition of property, you're looking at courts of equity, who has the greatest interests, needs for the use of the property, what a fair and equitable solution might be for all. If you have the most vested that will need to be shown and likely recognized and if you want to retain the property the court may well set a value and have you buy the others out. OTH, if the value is difficult to arrive at or others have similar interests, the court may well order the property sold and a distribution of the proceeds as to your contributions. Your management may or may not be included, did the judge have two lumps or three with coffee that morning? You already know there is no guarantee of what will happen. Seems too, the petitioner is usually favored as they are seeking the solution, so long as what is being asked is fair. I suspect part of the tactic is showing the others as not being reasonable.

Don't get emotional over real estate, unless it's your homestead ;) as desire can't be valued neither can intrinsic value. Always be prepared to walk away, just take your rightful reward. And yes, ask your attorney what the outcome might be, but s/he won't have any guarantee. Good luck :) 


I would love to buy them out, which would solve everything. They decided they didn't want to take the deal they offered and we accepted but then they wouldn't give us a number. Just some talk about appraisals (I would do) and that they needed 6 to 12 months to determine the value of the building. She seems to be trying to get cash from every valuation possible.  Perhaps a stall tactic to make us squirm. Unfortunately it worked.

We are willing to give them a nice chunk of cash to walk away. The llc was registered less than year ago and the property sale closed June 14. They have contributed almost no labor and are invested about 80k less than us. It seems like they could pick a number and walk away.

On a practical level, I think they are in Europe and haven't made contact in weeks so it's frustrating. Lots of cash coming in in the next few months so it would be nice to have them gone.

I am the registered agent but it was formed as member managed.  Hindsight is 20/20.

Agree that you need to lodge this with an experienced real estate and corporate attorney. The sooner, the better. Good luck.

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here