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Monday, September 7, 2015

When husband and wife fight -- who has rights in a jointly owned business?

We practice family and civil/corporate law VA, MD and DC. An excellent, and not uncommon question, was asked of us recently regarding family disputes over a 50/50 owned husband and wife company.

My husband and I started an #S-Corp business 25 yrs ago. We are both 50% invested -- he is the president, and I am the vice president and treasurer. Can he block me from bank accounts (which he has done since Jan 2015)? He also terminated my job. Is this legal? We are still living together and married.

There is a common presumption that ownership = #management of the business. While most often this is the case, it is only because no one challenges the presumption. In fact you can own the company, and not have any right to participate in day-to-day operations. Put another way, consider the business you both started as a stock investment. Like any other stock, you enjoy the profit and dividends, but not necessarily the right to tell the CEO what to do.

Having said that, the controlling document that determines what your husband can, or cannot, do is called the "Article of Incorporation" (in an #LLC it's called an "Operating Agreement"). That document can only be updated or changed with the consent of the corporate board -- in this case, you and your husband. Because I imagine you have not given consent, likely the original Articles are still controlling. Get those Articles and read them. It will say therein who may do what in terms of (a) owning shares in the business, and (b) controlling day-to-day operations of the business.

As to the bank records -- that's another kettle of fish. This gets confusing because a bank is a third party -- that is, someone who must rely on an officer of the company to tell it what it can or cannot do. First, check that the bank account is a corporate account, and not a personal account. If he opened a personal account, then you have more serious issues. However, if the account is corporate, and in the name of the business, your problems are solved by bringing the Article of Incorporation, and a copy of the state annual filing showing you as an officer (vice president). That should be sufficient to compel the third party (in this case, the bank) to place you on the list of authorized users with rights to deposit and withdraw from the account. Of course, that depends on what the Articles say....

Bottom line, though, is that your husband has to understand the "nuclear button" option. If he is unable to work with you, then you need to split the company. As a 50% owner, you have legal entitlement to 50% of the company. Although he may get "scared" and attempt to take the money and hide it, or destroy the business in spite, in the end, the law is clear -- as a fiduciary of the company (that means a person in whose care the business is trusted), he cannot squander (waste), or destroy the value of the company, or embezzle funds from the company. For a general explanation of these terms, see Section 13.1-690A of the Virginia Stock Corporation Act (VSCA) and 13.1-1024.1A of the Virginia Limited Liability Company Act (VLLCA) which imposes a duty of care and fair dealings. DC and MD have similar codes.

Presumably, this has nothing to do with your marriage. However, it is naive to think that such tension would play-out without dire consequences to a relationship. That last paragraph would almost certainly involve court action. Our law firm just won a long fought LLC court case in DC predicated on the destruction of a company owned by two brothers. Family and business...when it goes bad...goes really bad.

If you need help with this, or you don't have Articles at all (whoops!), then give us a ring. We'd be glad to help.

Hanover Law, PC
Offices in Fairfax, VA and Washington, DC
2751 Prosperity Ave, Ste 150
Fairfax, VA 22031
Sean R. Hanover, Esq.
Stephen Salwierak, Esq.
Lili O'connell, Esq.
Charles Hatley, Esq.

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