Buying out a Business Partner?

[NewChief]

Okay,

My wife and her friend went into business together about 6 months ago. My wife supplied the design/buying/art, and the partner was supposed to handle the store front and books.

The partnership has soured (I don't even want to go into it). The partner and her husband are moving to a different town and wanting us to buy them out of the business. They claim that they have $11,000 in it (which we don't believe). We also suspect that there has been quite a bit of freewheeling with the books and her "paying" herself when she claims she hasn't drawn a dime, saying she's only put more and more of her own money into the business (while not documenting the shit in any meaningful way).

She says she wants their money back, and they'll be out. Here's the deal: The business hasn't made a profit yet. We're only 6 month in.

Some options:
1) Pay them and be done, but saddle ourselves with more debt.
2) Try to value the business, looking at assets and such, then decide on a price to pay them.
3) Have a CPA (or someone) go over the books to try to give an accurate picture of what's gone wrong in the first six months. Then tell them to get bent because there was unethical shit occurring.

Other ideas? I'm stressed as hell about this right now, and we plan on hiring a CPA once the partner is gone. The business model is solid, and sales are good. We just suspect that we're not doing well because of poor book keeping and money "leakages." We do feel like the business is a liability, and few investors in a business would expect to be able to get their full money back in 6 months of doing business.

[Jenson71]

Originally Posted by Amnorix

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.

[wutamess]

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?

[Amnorix]

Originally Posted by La literatura

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.

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.

[Amnorix]

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.

[NewChief]

Originally Posted by Amnorix

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.

[Saul Good]

Originally Posted by NewChief

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.

[NewChief]

Originally Posted by Saul Good

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.

[Amnorix]

Originally Posted by NewChief

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.

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.