By Cliff Ennico
“Two years ago, my wife’s brother and I decided to start up a local taxi service (it’s a small town, well off the radar screens of Uber and Lyft). We set up a limited liability company (LLC) for the business. Because of some credit problems I had in the past, the city wouldn’t give us the medallion to operate the taxi service if I was a member of the LLC. So we made my wife 50 percent owner of the business, with my wife’s brother owning the other 50 percent.
“The business has done really well, so well that it’s totally gone to my brother-in-law’s head. He thinks it’s HIS business, even though my wife does all the books and I’m driving cabs just as much as he is. Last week we learned that he re-registered all of our taxicabs in his own name, shut down the LLC checking account and opened a new LLC checking account at another bank with him as the only authorized signature. He’s totally out of control. How can we get rid of him?”
There’s an old saying that says, “The road to hell is paved with good intentions,” and here’s a classic example. As I’ve said before in this column, nothing — and I mean NOTHING — will keep a business owner awake at night like when a partner goes over to the dark side and starts doing weird stuff without his or her knowledge.
Your first mistake was setting up the LLC as a 50/50 partnership between your wife and her brother. With only 50 percent of the voting power, your wife cannot legally overrule her brother’s crazy behavior. She should have been given 51 percent or more of the membership interests so her brother couldn’t do any of this stuff without her consent.
Putting your wife in as the 50 percent member also puts her in an incredibly awkward position, emotionally speaking. She loves you, of course, but this is her brother we’re talking about. You’re asking her to take sides, which certainly cannot be easy for her. You should not have assumed she will always see things your way.
In legal terms, your wife and her brother are deadlocked, meaning the LLC is stymied and cannot do anything because the owners can’t see eye to eye. At this point, you and your wife have four options:
• You can offer to buy her brother out.
• You can sue her brother.
• In most states, you can petition your state court to dissolve the LLC and divide up the assets between her and her brother.
• She can offer to sell her 50 percent ownership stake to her brother.
None of these solutions are perfect.
Buyout. Once someone becomes your business partner, the only way you can legally get rid of him is to buy him out. When you set up this LLC, you should have gotten her brother to sign a “buy-sell” agreement, which would have permitted your wife to buy him out at a pre-established price in the case of a deadlock. The time to get an agreement like this is when everybody likes each other and nobody’s thinking about getting divorced. In the words of Carole King, “It’s too late, baby/ Now it’s too late.”
Lawsuit. The actions your brother-in-law took to gain control of the business clearly breached his fiduciary duty to the LLC as a 50 percent owner. You can sue him for that (or threaten to sue in the hopes he will see the error of his ways). Keep in mind, though, that it will probably take months, if not years, and tens of thousands of dollars in legal fees before you get the judgment you deserve.
Dissolution. In most states, when an LLC is deadlocked, an aggrieved member can ask the state courts to dissolve the LLC and divide up the assets. The trouble here is that your medallion, or license to run a taxicab service, probably cannot be split in two. You will have to present a compelling case to the court so the judge awards the medallion to your wife, rather than her brother.
Selling Out. Since your brother-in-law now controls the LLC’s assets and “possession is nine-tenths of the law,” there may be no alternative but to have your wife sell her 50 percent stake to her brother and let him run the show. Since your brother-in-law probably doesn’t have enough cash to pay fair value for your wife’s share, consider offering him a royalty arrangement in which he pays a small amount upfront and then a percentage of his monthly gross sales (usually 10 percent to 25 percent) each month over the next three to five years.
It’s not perfect, but in a situation like this, it’s probably the only cost-effective option. You will have to get your brother-in-law’s attention, either by threatening to sue him or threatening to shut him out of the family in some way, before he will agree to a buyout. That won’t be easy — or pleasant.
For more information, see my YouTube video “Keeping Lawsuits at Bay.”
Cliff Ennico (crennico@gmail.com) is a syndicated columnist, author and former host of the PBS television series “Money Hunt.”
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