Legal Question in Business Law in New Jersey

capital accounts

we have a llc partnership, 3 partners.. partner 1 wants to retire. He wants 1 mill for his shares. partner 2 & 3 buy them for the asked price.. partner 1 stays on as a employee and continues to manage the business.. 1 year later, we find that the accountant ( a close friend of partner 1 ) had placed partner 1's NEGATIVE 250,000 capital account on partner 2 & 3's capital accounts-- partner 3 & 3 were never told this-- the accountant & partner 1 KNEW what they did was shady-- they kept the tax info from us anyway thry could-- we finally get the tax info showing that partner 2 & 3 now have large deficit cap accounts-- when we questioned the accountant-- he said -- well, partnber 1's shares were really worth more then 1 mill so we just did this with the cap accounts to make up the difference as creative accounting....

Partner 1 was paid 650,000 from a loan partner 2 & 3 took out and was still owed 350,000.. since we see what they did in a sneaky way with the negative cap accounts transfered to partner 2 & 3--- Can partner 2 & 3 PROVE to courts that the 250,000 cap account was PAID to partner 1 and now only 100,000 is the buyout balance owed?? If not then we were tricked into paying 1.25 mill for partner 1's shares..


Asked on 3/24/07, 12:15 am

2 Answers from Attorneys
John Corbett Corbett Law Firm LLC

Re: capital accounts

I think I understand all that.

A critical issue here is whether or not there is sufficient accounting room to back out the erroneous transation and correct the problem without actually getting cash back from parther 1. If there is, you are in a much stronger position than otherwise. To really tell how well you can recover would require a look at your operating agreement.

It is safe to say that you can't afford not to try to recover what is owed. You also don't say what the status of Partner 1 and the accountant are today. I would imagine that you want to get them separated as soon as you can. Also, don't dismiss the possibility that there may have been some criminal conduct.

My firm handles matters of this type, however it may be easier for you to work with a lawyer whose office is closer to you. Even so, if I can be of further help to you, please call or email.

See also: http://info.corbettlaw.net/lawguru.htm

Read more
Answered on 3/24/07, 1:11 am
John Corbett Corbett Law Firm LLC

Re: capital accounts

After reading your question one more time, I think that you answered the question that I posed about accounting room. It seems that you still have $100k to pay if the transaction is as you intended it. That is a good situtation. We should talk about what documents you can produce to memorialize the transation. The Operating Agreement, any buyout agreement, and any agreement for this specific buyout transaction would be important in whatever form they exist.

If things are the way I think they are, you should be able to control what happens next and Partner 1 will have to take you to court if he disagrees.

My contact information is associated with this message.

Read more
Answered on 3/24/07, 9:25 am


Related Questions & Answers

More Business Law questions and answers in New Jersey