Legal Question in Business Law in New York

Business Relationship Gone Sour

A year and half ago a friend and I decided to work together on a project that I created while living overseas. Mainly due to our lack of business knowledge we created a limited liability company where I was the CEO and she was listed as President. After working together for two months I realized that she did not have the skills necessary for the role she was given. I asked her to take the role of Marketing Rep; she refused but accepted the role of Vice President. A few months after that I decided that the LLC was the wrong structure what we were trying to accomplish and dissolved the LLC after I spoke with her and setup a nonprofit organization.

Several months after that, we began to argue over titles and roles and she left the organization. During the year or so that we worked together she contributed a little over $4,000 to the organization. Now she is asking for her money back. Since she gave her money freely, and we did not have an operating agreement is the organization obligated to pay her back? She is asking to be paid back for items she still has in her possession and I am unclear if she can ask for payment on items she still owns. She also has not returned private documents. What should the organization do?


Asked on 8/01/05, 1:37 pm

2 Answers from Attorneys
Meyer Silber The Silber Law Firm, LLC

Re: Business Relationship Gone Sour

She may be entitled to her money back. What did the LLC agreement say (I assume that you had some LLC operating agreement)? What happened to her investment/contribution?

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Answered on 8/01/05, 1:53 pm
William Frenkel Frenkel Sukhman LLP

Re: Business Relationship Gone Sour

You did not clarify if your friend was a member (equity holder) in the LLC you created. If so (and her contribution of funds may support this conclusion if that was intended as a capital contribution and not something else), and you never executed an operating agreement, the only thing you have to fall on is the state law under which the LLC was organized. If your LLC was organized under New York law, the general rule is that a withdrawing member is entitled to the fair value of her membership interest in the limited liability company. Of course, if your friend never withdrew as a member (assuming she was one) voluntarily or was expelled, then at the time the company was dissolved she was entitled to share in the proceeds of the remaining assets (after all creditors' claims have been satisfied).

The lesson from this is that operating an LLC without an operating agreement leads to potential trouble. If your friend was indeed a member of the LLC, she is probably entitled to her share of net liquidation proceeds and may resort to legal action if this is not settled. Naturally, to give you a clear idea of where you stand with this, all of the relevant documents and information must be reviewed. Feel free to contact me if you need consultation on this.

The above is in the nature of general information, is not legal advice and should not be relied on as such.

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Answered on 8/01/05, 7:13 pm


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