I'm heading to a meeting in a few minutes to discuss with the partner. As of now, she's being very amicable and easy going. My current plan of action for this meeting.

1) Start removing her access/control of any accounts associated with the store.
2) Tell her to get everything ready to turn over to our CPA for tax purposes.
3) Tell her that we'll dissolve the corporation and discuss possible buyout after taxes have been filed and we have an accurate picture of the business's worth and liabilities at year's end.

They're trying to move, her husband is starting up a company (with his brother in law... man oh man...), and they seem to be pretty agreeable because they have other shit to deal with as well. We'll see if they're that agreeable when we start making lowball offers based on the worth of the store. In addition, this is an extremely busy time of year for the store, so it's all we can do to stay afloat and deal with the demands of the store without trying to restructure and hire someone for the holidays. I know this also sucks, because the net worth of the store may grow in the next month or so due to the revenue for the holidays, thus giving her more value in the buyout. That's okay, though.

Many of the recent problems built up over Thanksgiving Break while they were out of town, and we were communicating through emails (resulting in a lot of miscommunication between the wives) while the wife and I were busting our asses at the store.

The business is an LLC, btw. We will probably try to dissolve the LLC and refile as an S-corp.

Thanks so much for all the advice. It was tremendously helpful and comforting. I sent a lot of it to my wife. She sent it to her stepfather, who was extremely impressed with the quality of advice from some internet message board (he's a healthcare lobbyist and businessman who we haven't let get involved because he's so ruthless in this shit and we wanted to try to salvage the friendship).

This place rocks.

Ah, different rules with LLC. Good luck and don't be afraid to drag your feet before agreeing to anything unless it's something you want to pounce on :D

Sounds like a good development, all things considered.

You can still be an LLC and also be an S-corp. S-corp isn't its own entity, it's just the subsection of the IRC that you do your taxes under.

Yep. Time is on your side here.

I see no harm in accounting for sales from this point going forward as outside of the settlement agreement if they are basically walking away from the enterprise and not contributing further at this point.

That's going to be a tough sell. If the business is poised to have a big holiday season when the separation occurs, the business had value, albeit unrealized, in the period immediately beforehand.

you don't have to totally cut them out, but if they are no longer contributing to the enterprise, they shouldn't reap an equal share of the profits. THEY asked to get out, not the other way around. They could have stuck it out until after the holidays.

Well, it's certainly not JUST those two. Certainly you could form a C Corp or S Corp or various partnerships.

I don't know the rules in California, but the normal rule is that you can have a business whether or not you formally file any kind of paperwork with anyone. The paperwork relates mostly to tax obligations and legal liability issues, as well as ownership of assets being vested in a third party rather than individuals, etc. etc.

I'm not a bankruptcy attorney nor a CPA, but I definitely understand where you're coming from. I do alot of bank work (though not DIP financings) so I see the end result sometimes.

This is categorically incorrect. S Corps and LLCs are formed under different statutes under state law and have different requirements/limitations under those laws. They are both treated as pass-through entities for tax purposes, and offer liability protection to their owners through the organization of the business, but they are similar in the areas that are usually critical when deciding what type of entity to form, but an S Corp IS it's own entity (a corporation, rather than an LLC), they are NOT identical and a company CANNOT be both.

They are not identical, but a company can be both for federal tax purposes. An LLC can elect to be taxed as an S Corp, using Forms 8832 and 2553. Most LLCs file under Subchapter K, but for whatever reason, they can elect (through a simple 'check the box' method) to file under Subchapter S.

I don't know if it's been said or not but why not start over since all you'll probably need is a change of ownership or name?

Sorry, yes, you're right. I was thinking you can't be both a corporation and an LLC under state law, which is the case. You're talking about S Corp treatment for tax purposes for an LLC. I'm not enough of a tax guru to know why you'd want to do that, but apparently you can.

Sorry.

Hey NewChief -- did this situation work out ok for you? Obviously you don't need to share too much if you don't want to, but I came across this thread looking for something else, and it made me wonder.

Sadly, it's still ongoing. The positive part is that we agree that all the factors of negotiation would be handled for the year 2012, so we're financially separate from our former partner as of 1/1/2013.

We're still in the process of affixing a value to the business for the year 2012, though. Things got very ugly for a while, but they've moved away, causing a lot of the anger to dissipate. We're going to pay them something just to be "fair," but we've yet to determine that amount. Our basic idea is:

Value of inventory as of 12/31/2012 plus amount in bank as of same date.
Subtract outstanding liabilities (invoices that hadn't been paid for 2012, CPA fees, taxes, remainder of lease, etc..).

Divide by 2 then subtract any money that the partner pulled out over the year of 2012 as payments to herself.

So you're letting them skate on the lease? If their name is on it, you should use that as leverage if they want to drag this out.

We are subtracting their half of the remaining lease payments (3months) from their payout.

Sounds like a reasonable resolution. Sorry it has dragged on so long though.

I dont' remember how it's organized, but if there were filings with the state (for a corp or LLC) then be sure to make any necessary filings to update the fact that she is no longer an officer/partner/owner of the company.