Distributions | Dividends Category Archives — The Business Divorce Law Report Published by Business Lawyer

September 15, 2023

Equitable Accounting Opens the Black Box of Business Finances

An equitable accounting is a cause of action that requires those in control of the finances of a closely held business to account for their use of the money.
An accounting a two-stage process. First the controlling party must render an account of how it used the assets of the business. Then there is a proceeding for the minority to object to the accounting.
When a court finds that the party in control has misappropriate or misued the assets of the company, it can order repayment.
A minority member should demand an accounting before seeking the accounting in court and be prepared to support the request with plausible claims of misconduct.

For many minority owners of closely held businesses, the finances are sometimes a black box. There is a result, but where that result came from is unknown. The cause of action for an equitable accounting is a tool that gives the owners who don’t have day-to-day management roles a look inside the black box of the closely held company’s finances.

More Questions? Learn More. You can call me at 973-602-3915 or use our Contact form to reach me by email.

The term black box comes from engineering and describes devices or systems that give a result from a set of inputs, but the process inside is a mystery. This lack of transparency makes it challenging to troubleshoot issues or make modifications to the black box without specialized knowledge or access to its internal components.

The same may be true of the finances of the closely held corporation, limited liability company, or partnership, particularly when there are questions about the majority’s behavior. Where, for example, there is a question about the misuse of an LLC’s assets, the minority may be able to sue and hire its own forensic accountants to reconstruct the workings of the black box. But if they can prevail in a cause of action for an equitable accounting, they shift the responsibility for the process to those in charge of the books. Equitable Accounting Provides Transparency in Finances for LLC, closely held corporations

There is a significant difference between putting the responsibility to explain the use of the assets of the LLC and pay back what was improperly taken and simply getting access to records. That has been the central point of a number of cases involving claims for equitable accounting. We examine some of those cases here under New York and New Jersey law, including a very recent decision from a federal court in the Southern District of New York applying state law.

August 15, 2023

When Are Limited Liability Companies Required to Distribute Profits?

by Jay R. McDaniel, Esq.

There is no statutory right to receive a distribution of profits from a limited liability company before it dissolves and winds up its affairs. Distributions before then are discretionary.
Profit distributions are in the discretion of the majority members or commonly in the discretion of the managers of the limited liability company.
A minority member who is not receiving distributions may have a claim under the operating agreement or as an oppressed minority member if the majority refuses to make profit distributions.

Profit distributions are a frequent source of dispute among the members of a limited liability company. The fundamental question of who decides when distributions are made, how much is made, and how to deal with the tax issues related to distributions, profits and losses can all be the source of conflict.

More Questions? Learn More. You can call me at 973-602-3915 or use our Contact form to reach me by email.

The short answer to the question of when a limited liability company must distribute profits is that ‘it depends.’ And many minority owners of LLC interests are frustrated to learn that they have less control over the process than they anticipated. New Jersey minority oppressed LLC member attorney

Limited Liability Companies Often Do Not Have Operating Agreements

Entrepreneurs choose limited liability companies as the form of a new business far more often than corporations or partnerships. They are cheap and easy to form and do not require the type of documentation and formalities that you generally see associated with other entities, corporations in particular. Continue reading

November 1, 2016

LLC Distribution Needs Definition

by Jay R. McDaniel, Esq.

The Appellate Division sent a case back to the trial judge to figure out exactly what the owners of an LLC meant in a settlement agreement when it referred to when it linked a contingent payment to a “distribution.”

The case, which involves a relatively modest amount in dispute, is a cautionary tale arising from the use of a statutorily defined term in a context in which it just wasn’t clear what the parties were referring to. One of the parties pointed to the dictionary and the other the text of the statute.

Be Careful with that Word

September 19, 2013

No Shareholder Oppression in Refusal to Buy Minority Interests

by Jay R. McDaniel, Esq.

Holding a family business together gets more difficult as time passes, as this recent opinion
from the Appellate Division demonstrates. A rift between the family members still working for, and in control of H. Schultz & Sons, resulted in the minority members who stopped receiving dividends while the company was trying to remake itself from a retailer to a distributor.

No Shareholder Oppression in Exercise of Majority’s Business Judgment

The failure to pay dividends and a refusal to use the assets of the business to buy out the non-employee shareholders, however, in itself is the type of conduct that rises to shareholder oppression.

The group of minority shareholders who claimed that the corporation’s refusal to purchase their interests was shareholder oppression failed to establish a viable claim under New Jersey’s Oppressed Shareholders Act, says the Appellate Division

Affirming the trial court’s opinion in Goret v. H. Schultz & Sons, Inc., Docket No. A-4281-10T1 (App. Div. Sept. 10, 2013), the Appellate Division affirmed the holding that the refusal to repurchase minority interests no longer receiving dividends was an appropriate exercise of the business judgment rule.

An equitable accounting is a cause of action that requires those in control of the finances of a closely held business to account for their use of the money.

An accounting a two-stage process. First the controlling party must render an account of how it used the assets of the business. Then there is a proceeding for the minority to object to the accounting.

When a court finds that the party in control has misappropriate or misued the assets of the company, it can order repayment.

A minority member should demand an accounting before seeking the accounting in court and be prepared to support the request with plausible claims of misconduct.

There is no statutory right to receive a distribution of profits from a limited liability company before it dissolves and winds up its affairs. Distributions before then are discretionary.

Profit distributions are in the discretion of the majority members or commonly in the discretion of the managers of the limited liability company.

A minority member who is not receiving distributions may have a claim under the operating agreement or as an oppressed minority member if the majority refuses to make profit distributions.

Limited Liability Companies Often Do Not Have Operating Agreements

Be Careful with that Word

No Shareholder Oppression in Exercise of Majority’s Business Judgment