Denver, CO asked in Business Law and Small Claims for Colorado

Q: Do I have a legal right to file a claim for money owed in Small Claims Court?

I am a co-owner of a business here in Colorado. The business is based on a Verbal Agreement between me and my partner. He had a Verbal Agreement with our client to get paid on a monthly basis for our services. Our client paid us per our Invoiced amount up until Jul 2021. He is now in the rears Aug-Dec. Can I, as a co-owner, file a claim in Small Claims Court to get the money due? My partner does not want to file a claim and just write it off. I have also noticed on the Invoices that he had our client pay him directly to a business in his name only (that I am not a co-owner of) via Venmo and not our business name or account. He would then pay me from this Venmo account. What are my rights here?

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1 Lawyer Answer
Kevin Michael Strait
Kevin Michael Strait
  • Fort Collins, CO
  • Licensed in Colorado

A: If you do not have a business entity (like an LLC or a Corporation) and your business is based on a verbal agreement and no formal arrangements, then you are likely in a "general partnership." A general partnership is the legal relationship between partners that operate a business with no formal agreements and no business registered with the state. General partnerships place each partner in full control of the business and each partner can speak for the business. If a client owes the partnership money, and one partner wants to pursue the payments while the other does not, then the partnership is "deadlocked" and need to call a mentor or mediator to help break the conflicting decisions. Whichever partner acts decisively may end up controlling the situation. If the client is told to ignore the debt, the client can reasonably rely on that statement. But if the client is told to pay up, the client can reasonably be expected to pay.

If you do have a formal business entity (like an LLC or a Corporation) and you simply operate the business on a verbal agreement, that is a slightly different situation. In that case, the business entity will have directors, managers, or members. The people in those leadership positions may be different than the "owners" or "founders" of the business. With no written operating agreement, the persons named in the business formation documents are in charge. A verbal agreement to give you some control over the business is technically valid, but hard to prove. A could could easily find your position in the company is subordinate to whomever is named in the documents that formed the business entity.

You bring up a separate topic: The channeling of payments (revenue) to a personally-held bank account is not actually illegal, but it creates two obvious problems. First, it is a headache for tax accounting. Your CPA will thank you not to deposit revenue into a personally held account, then transfer it back out to the business. Second, the legal protections of a formal business entity are eroded by indiscriminate use of a personal bank account in parallel with a business bank account to operate the business. Without good records and a good reason, the use of a personal bank account (like you described) can leave the business owners, managers, or operators open to being sued personally by folks upset with the business. It is cheap and easy to keep this liability at bay; only transact business exchanges in your business bank account.

Ask your CPA or an attorney to help you make good business records to account for the past use of personal accounts. By recording it and adopting some company resolutions, you can set yourself back on the path of limited personal liability.

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