Legal Question in Business Law in Virginia

Re: Partnership buyout

Well, welcome to the joys of a limited liability company. There has been a tremendous amount of excitement and "fad" thinking about pushing people into LLC's. LLC's are, in my opinion, the "pet rocks" of business law, pushed by legal quacks. If you had a standard corporation, there would be standard answers. This is the reason why I advise people against LLC's.

LLC's allow the "members" to design the rights and obligations anyway they want. That means that there are NO standard answers. The only thing that will control is the intent of the parties to the agreement. What all of you actually intended when you entered into the operating agreement will of course be shown by the explicit wording of the operating agreement. However, where the operating agreement does not tell us the answer, then the arbitrator or the court would look at all the surrounding facts and circumstances to try to figure out what the parties (members) intended at the time they created the operating agreement. What you and they are saying NOW will NOT be relevant. THe question is what did you mean THEN when you entered into the operating agreement? Any emails, letters, meeting notes, etc. might be relevant in figuring this out.

First, let me say that I think all of you are off on the wrong foot. "Net worth" is not a measure of profits. You are looking at the amount of profits. That comes from the profit & loss (income) sheet. But the balance sheet shows assets and liabilities -- not profits. Accounts receivable would show up as an asset on the balance sheet regardless of whether the income sheet is being measured by the cash or accrual basis. Whether your profits are showing up as cash in the bank or accounts receivable, the calculation of "net worth" should be identically the same either way.

Also, the common understanding of "net worth" would be considered, but only if the operating agreement is not clear otherwise what the parties meant.

To the extent that the agreement specifies the year-end balance sheet, I think that would control the question, if you knew and understood at the time that the accounting was on the cash basis. If you agreed to go by the year-end accounting statements, and you all knew at the time that the company was using the cash basis, then I think the cash basis controls the answer. But if cash vs. accrual was decided later, then maybe not. This might become a very difficult mind-reading exercise into what you knew and intended THEN (not what you are saying now).