Business Ownership Disputes • Part Two of Three
For years, money arrived every month. You understood it to be your share of the business. After the relationship ended, the other side called it salary, equipment rent, or repayment of a loan. The bank statements prove that money changed hands. They do not explain why it was owed.
That explanation can determine both an ownership claim and a payment claim. It can also determine who should bring the lawsuit. Before calculating what you are missing, identify the agreement behind each stream of money.
Separate the payment streams
A person can be an employee, an investor, a lender, and the owner of an equipment company at the same time. Those roles should be examined separately even when the business treated them casually.
Start with a payment schedule. For each stream, identify the payer, recipient, governing agreement, calculation method, payment dates, and accounting treatment. Keep wages and bonuses separate from distributions, loan payments, reimbursements, and rent. Record changes in amount and the explanation given when each change occurred.
Consider a hypothetical operator who receives payroll checks personally while an LLC he owns receives monthly equipment payments. He says the LLC payments were a way of delivering his share of operating profits. The company says they were lease payments. The size of the payments does not decide which explanation is right. The lease, invoices, payment history, financial calculations, and contemporaneous communications become central.
A payment tied to profits does not automatically establish partnership
Texas and California both distinguish profit rights associated with ownership from payments that use profits as a measure of compensation. Their statutes are similar on this point, but they should not be treated as interchangeable.
Under Texas Business Organizations Code § 152.052(b), receiving a share of profits as wages, contractor compensation, rent, debt payment, or certain loan charges does not, by itself, indicate partnership. Sharing gross revenues also does not, by itself, establish that relationship.
Under California Corporations Code § 16202(c)(2)–(3), sharing gross returns is insufficient by itself. Receipt of business profits creates a partnership presumption, subject to specified exceptions that include employee or contractor compensation, rent, debt payments, and certain loan charges. The reason for the payment matters.
A compensation arrangement can give someone a percentage of earnings without giving that person equity. Conversely, an owner’s distribution might be routed through another entity. Either explanation needs evidence. Calling a payment profit sharing in a later demand letter will not reconcile conflicting records.
Reconstruct the calculation
Ask how the payment was determined before the dispute. Was it a fixed amount for each machine? A percentage of revenue? A percentage of net profit after specified expenses? A regular advance followed by a year-end adjustment? Were losses carried forward? Who prepared and approved the calculation?
A fixed payment through profitable and unprofitable months may support a lease or compensation explanation. It may also be an advance against a later reconciliation. A fluctuating payment may reflect profit participation, changing equipment inventory, bonuses, or another contractual formula. Compare the explanation against several periods, including bad months, instead of choosing one favorable example.
For a net-profit formula, define the expenses. Owner compensation, affiliate charges, financing costs, reserves, equipment purchases, and depreciation can change the result substantially. Identify which items the agreement permits and whether the same method was used consistently.
Suppose the company replaces leased equipment with newly purchased machines. The equipment owner may lose rental income. An operating business may gain or lose profit depending on the costs. An investor’s distribution may change for a different reason. Those effects should not be combined into a single number labeled lost profits.
Read the distribution provision before assuming cash was due
Proof of an ownership interest does not finish the payment analysis. Read the provisions addressing allocations, distributions, reserves, approval authority, timing, and capital obligations. An allocation of taxable income and a payment of cash are different events.
A provision authorizing distributions raises different questions from a provision requiring a defined payment on a particular date. If discretion is disputed, examine the contractual limits, the reasons given, the financial records, and any applicable duties. Neither a profitable year nor a distribution clause should be read in isolation.
Also identify whose promise is involved. A member’s commitment to contribute capital, the entity’s obligation to distribute cash, and an employer’s obligation to pay salary are separate obligations. Paying one does not establish that another was performed. A claim for an unpaid contribution needs the commitment, any conditions, and evidence showing when payment became due.
Identify the injured party
A shortfall owed under an individual’s compensation agreement differs from a loss suffered by an entity that owns equipment or customer contracts. The fact that the individual owns that entity does not make every entity loss a personal claim.
In Linegar v. DLA Piper LLP (US), 495 S.W.3d 276, 279–80 (Tex. 2016), the Texas Supreme Court distinguished harm solely to a corporation from a wrong and injury personal to a shareholder. That distinction requires examining the particular duty and claim. Entity statutes and derivative procedures, including rules for closely held businesses, also need review before choosing the claimant and remedy.
If an equipment LLC is the lessor, review its contractual claim. If the individual was separately promised wages, review that personal claim. If money was diverted from the operating company, consider the company’s rights and the appropriate procedure to enforce them. Keep each damage calculation tied to the agreement, injured party, and alleged breach. Avoid counting the same loss twice.
Use the records to narrow the dispute
A useful initial review includes the agreements and amendments, payroll records, lease schedules, invoices, bank statements, general ledger entries, financial statements, and tax reporting. Add the emails or messages that explain adjustments. Identify records you do not have and use the applicable access or discovery procedure to obtain them.
The practical questions are straightforward. What amount was owed? Under which agreement? To whom? On what date? What calculation supports it? Which evidence contradicts it? Answering those questions makes the demand more credible and the defense easier to assess.
For related issues, see Investor Books and Records Demands and Temporary Restraining Orders and Temporary Injunctions in Texas Business Disputes. Part Three addresses preserving assets and operations while the parties litigate their rights.
Matthew Clarke handles business disputes involving ownership, compensation, equipment arrangements, and control. A review that separates the payment streams can reveal which claims are supported and which records are still missing.
This article provides general information, not legal advice. The governing law, entity documents, and facts of a particular dispute may change the analysis.
Read the Three-Part Series
Part Two: Salary, Rent, or Profits?
Part Three: Protecting the Business
Contact Matthew Clarke to discuss a business dispute.