Two people, Mary & Holly create a staffing business. Business is formed as an LLC. Partners agree verbally that they will split all profits and liabilities. There is no writting Operating Agreement for the LLC. Mary has complete control of the business, agreements with thirdparties, and accounting. Mary has not let Holly see the business’s books and the accountant is Mary’s good and close friend. Mary has been telling Holly the business is dying. But about six months ago, Holly negotiated a extremely large staffing agreement with a big client. The deal fell through because the new client was dissatisfied with the financial disclosures. Holly just found out that Mary has withdrawn roughly $200K from ATMs and over the counter from the business in the last 18 months. Furthermore, Mary has been swiping her card for tons of personal stuff (spa, gym, house, car, breast enhancement surgery etc etc). Mary has also not paid the employees’ withholding taxes or business’s income taxes to the IRS. Mary’s been spending the money. Holly is now up to her ears in trouble. What can she do?
The first thing for Holly to do is get a new accountant and sue in court for an Accounting. She will probably also have to ask for a receiver so Holly can install her own manager in place of Mary. I would check the uniform state LLC code since that takes the place of written agreements when there is none (as in this case). I would also look to local common law for various breaches of fiduciary duty, fraud, breach of contract, indemnity for the IRS taxes owed and punitive damages.
Mary will also probably need an IRS tax specialist to help negotiate with the IRS to reduce or eliminate the penalties and avoid (to the extent possible) joint and several liability for the taxes. The accountant is also vulnerable too. S/he should be cooperating to avoid being named as part of the coverup. The accountant may also have malpractice insurance.
One thing for sure: this will be a very expensive and unpleasant trip down what a friend calls “agony lane.” It’s ugly. Worse, I’ve never found any way to convert this type of case into a contingency case and (too often) Mary will have spent the loot so Holly can’t even recover it.
I’m in the middle of this case now and it has lasted over a year already with no end in site.