How To Lose Your Small Business in 10 Days – Days 1 and 2

How To Lose Your Small Business in 10 Days – Days 1 and 2

On Behalf of | Nov 13, 2014 | blog, Firm News

Mario and Luigi’s New Business – Plumbing & Pizza Delivery

As noted in our last blog, brothers Mario and Luigi agreed to open a business together.  Mario wanted to open a plumbing business while Luigi wanted to open a pizza business.  Eventually, the brothers discussed the idea with Mario’s spouse, Peach, who in Luigi’s mind is no “peach” at all.  Ultimately, they decided to open a Plumbing & Pizza Delivery business.

Day 1:  No Founder’s Agreement

Believing they are finally on the same page, Mario and Luigi hit the ground running, confident their business will become a success.  What they failed to realize, however, is that they each had a very different idea of which service was the main service provided by the business and who was the controlling partner.  During their discussions, Mario and Luigi each agreed that the brother whose service produced the most revenue would be the controlling partner and have a 51% share of the business.  So, if plumbing was the service which produced the greatest revenue, Mario would be the controlling shareholder and if pizza delivery produced the greatest revenue, Luigi would be the controlling shareholder.  Ultimately, Mario and Luigi failed to document their pre-business formation conversations and there were no witnesses to their agreement.  Although this may seem like harmless neglect, this failure will soon come back to haunt them.

Day 2:  Beginning Work without Formally Filing as a Corporation and Drafting a Buy/Sell Agreement

Although it had crossed their minds, Mario and Luigi elected not to file articles of incorporation with the State of Florida, as they had a big plumbing job already lined up and a massive order of pizzas to make and deliver.  Unfortunately, while performing his plumbing duties, Mario was injured, hospitalized, and, sadly, passed.  As a result, Luigi was forced to work double-duty doing plumbing work and making and delivering pizzas.  The news of Mario’s death, while unfortunate, spread and resulted in a boom to the Plumbing & Pizza Delivery business.

While Luigi was taking in orders and believing he was now well on his way to early retirement, he was approached by Peach, Mario’s widow, who says, “Hello, Partner.”  Luigi’s worst nightmare had just come true.  Because he and Mario failed to draft their intentions via a Founder’s Agreement, failed to file Articles of Incorporation with the State, and failed to prepare a corresponding Buy/Sell Agreement for their business, a de facto partnership was formed between Mario and Luigi.  As a result, Mario’s fifty percent (50%) stake in the Plumbing & Pizza Delivery business passed on to Peach after Mario’s death.

Had Mario and Luigi properly filed Articles of Incorporation and executed a Buy/Sell Agreement, Luigi could have had more control over what happened to Mario’s share of the business.  In fact, the Buy/Sell, if properly drafted, could have resulted in the entire business transferring to Luigi upon Mario’s death or permitted Luigi to buy out Peach.  Instead, Luigi now finds himself equal partners with the not so peachy Peach.