The Perils of Do-It-Yourself Business Entity Formation

Two owners have formed a Florida limited liability company (“LLC”) to operate a franchise unit in Fort Lauderdale. Being good friends who wished to show their deep trust of each other, they intended to be equal owners in all respects. They were proud of having set up their new business without the need of any professional advice. While the business appears as an LLC in the State’s public records, the two “partners” never got around to actually signing any organizational documents. They do not have any written operating agreement and do not know what one does.  Nor do they know the necessary formalities to be observed regarding their business entity.

Now fast forward a few years. The partners are no longer enamored with their business relationship. Profits have been falling. Some of the business’ bills are not being timely paid, others are not being paid at all. Each owner feels the other isn’t pulling their weight. One owner has started having the business pay those of her personal expenses which she claims are related to her operating the business. This includes her home mortgage because she “thinks about the business’ problems at home every night”. Not to be outdone, the other owner is taking money out of the business to pay what he calls “interest” on his initial capital contribution to the business. Each now wants the other out of the business. Their franchisor has let it be known that it is not happy with their current ownership situation. Perhaps a mediated solution can be reached between these owners which could avoid what would appear to be the on-rushing and costly reality of civil litigation.

While this little melodrama has been embellished to make a point, similar story-lines are all too common. In practice, the initial investment in obtaining professional advice on business entity formation and operation is often more than offset through avoidance of future costly problems – many of which cannot easily be undone. Among such problems may be: the loss of an owner’s shield against personal liability for business debts due to an improperly implemented and operated legal entity; becoming enmeshed in decision-making deadlocks; and lack of an orderly method for ownership transition.

 

Stephen M. Feidelman maintains a general civil law practice in Hollywood, Florida, with a core concentration on franchise and dealership representation and allied business law issues. He has attained a Martindale-Hubbell Peer Review rating of AV®, Preeminent™ – 5.0 out of 5, which depicts that a lawyer is recognized for the highest levels of skill and integrity; has served on the Executive Council of The Florida Bar Business Law Section; chaired The Florida Bar’s Antitrust, Franchise and Trade Regulation Law Committee; been a faculty participant in numerous seminars related to franchise and business opportunity legal issues; contributed to Florida Bar committee consumer education pamphlets and seminar course materials; and been a guest college lecturer on franchise law issues. He is also a Florida Supreme Court Certified Circuit Civil Mediator and a Qualified Arbitrator.

 

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