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How does my "sweat equity" compare to initial investment provided by my business partner?

Asked over 2 years ago - Austin, TX

Business

co-own a company to where my percentage of ownership is 49% and the other owner has a majority 51%. He has put in around $15,000 of equity into the business, whereas i have put in around $5-7000. Upon the inception of the business we were both working around the same number of hours for probably around 3 months. After a huge backbone of the business never came into fruition, my business partner completely stopped working. Now I have completely grown the business by making contacts and continued work. So, now that the growth has come and it seems like there is money to be had my partner wants more involvement. I have been putting hundreds of thousands of hours into this business and I would like to know if my countless hours of work and building the company mean anything legally or if it wo

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We are going through the "buy-out" phase right now. According to the partner he/she thinks that initial investment plus my salary should be matched. My other question is if he was gone for around 8 months, is he inherited this income while gone? During the buy out do my labor hours plus my initial investment count towards any of his investment? Any help is appreciated.

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Attorney answers (2)

Robert John Murillo

Reputation Level 15

Answered over 2 years ago. Business Attorney in Boulder, CO.

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Unless Texas is rather unusual, there is no law that allows a member with a fixed percentage to suddenly get a greater percentage or more rights because they claim to have provided more value. Absent an operating agreement provision or oral agreement to the contrary, the ownership and respective rights are now set.

If you don’t have a written operating agreement, get one now. Contact a local business attorney to draft this and hope you two can come to an agreement and this can contain terms going forward regarding the amount of time that must be spent by each member and other terms. In the event those terms are violated, the operating agreement can structure a buyout mechanism. Without this written agreement you are left to possibly some vague oral agreement, state statutes and the courts. In short, it could be an expensive and time-consuming mess if there are problems down the road.

You should speak with a local attorney regarding your issue. Contact people you know and trust for referrals. If you have no referrals, contact your local bar association for their referral program. Good luck.

DISCLAIMER—This answer is for informational purposes only and discusses general legal principles, trends, and considerations and is not intended as specific legal advice regarding your question. This answer does not establish an attorney client relationship. For legal advice, you should retain legal counsel in your state for advice regarding your specific circumstances.

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Kaiser Wahab

Reputation Level 14

Answered over 2 years ago. Business Attorney in New York, NY.

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First and foremost some of your questions can and should be answered by whatever partnership agreement you currently have. Secondly, many of the issues that you raise are really negotiation points rather than legal points.

In other words, absent some language in a contract that speaks precisely to "Sweat Equity", the value of your labor will need to be negotiated. And this is more of an art than a science. You should definitely consult with a local business attorney who can skillfully argue a valuation position. That attorney should also be familiar with the state rules regarding forced dissolution of the entity if the parties cannot agree.

Good luck.

Disclaimer: This answer is for informational purposes only and does not constitute general or specific legal advice, nor create an attorney client relationship.

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