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Question added to topic Grow Your BusinessMarch 18, 2011

What Can I Do When an Investor Freezes Funds?

I started a new business with a partner three months ago. He had the money but no experience while I had the experience but no money. His initial investment was $15,000. Mine was $0.

Since then, I feel as though certain stipulations in our operating agreement have been breached. He has withdrawn all funds from our company account and will not allow access to bank statements, transaction statements, etc. We purchased a van using company funds but it is registered in his name.

What can I do?
Luckily for you, this leopard showed his spots early in the game. You may be right -- that your partner has violated certain provisions of your operating agreement. Putting in all the money and then withdrawing it all does not seem like a sound business practice to me.

The fact remains, though, that you didn’t put any money into the venture. Unless you contributed vast amounts of tangible intellectual property (customer lists, marketing materials, etc.), you could easily leave this venture and start another one right away because you’re the one with the know-how.

It would be best to consult with a business attorney in your area to figure out your options and how to make sure your partner’s misdeeds don’t come back to haunt you. In the meantime, here are a few other things to consider:

1. Review all contracts to make sure he/she didn’t offer any personal guaranties and to see what long-term obligations the company entered into.

2. Review the operating agreement to see if there are any prohibitions about soliciting clients or vendors.

3. Have a frank discussion with the financial partner about the possibility of dissolving the business, closing accounts and how clients will be served going forward.

Nina L. Kaufman, Esq. is an award-winning New York City attorney, edutainer and author. Under her Ask The Business Lawyer brand, she reaches thousands of entrepreneurs and small business owners with her legal services, professional speaking, information products, and LexAppeal weekly ezine. She also writes the Making It Legal blog.

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