Cause of Action for Conversion of Property

Sole Proprietorship

It’s probably obvious that this is the simplest form of business ownership. A sole proprietorship is owned and run by one owner solely for their own benefit. It’s simple, straightforward, there isn’t much – if any – paperwork.

There are a few advantages to operating as a sole proprietorship. All the profit is yours. There are no governance requirements so there’s not much paperwork. You have total control of every facet of the business. About the only thing you need to start is an idea and, perhaps, a business license.

That undoubtedly sounds enticing, but there are some serious disadvantages, You are personally liable for business debts and legal liabilities. It’s hard to transfer or sell a sole proprietorship, which means it’s also difficult to leave to your heirs. There aren’t many options for tax planning or savings.

When you come down to it, a sole proprietorship is not a very effective way to organize a business. But it is simple.

Partnerships

There are two main forms of partnerships: general and limited. There’s a number of variations, but they all share the same pros and cons. In a general partnership each owner invests their money, property, labor – everything - to the business. The owners are jointly liable for all business debts regardless of how much they’ve contributed to the business. Even if you only invested a minimal amount of capital, you’re still potentially responsible for all the business’s debt.

A general partnerships does not require a formal agreement. It can be based on a verbal agreement. It can be inferred based on the conduct of the owners. If you act like partners, make decisions like partners, pay bills like partner – you’re probably legally a partnership. A real drawback to a two-person general partnership is that at the death of one partner the partnership will most likely have to be dissolved.

Limited partnerships require a formal agreement and filing with the state. It can’t be inferred. Limited partnerships do exactly what they sound like – they allow partners to limit their personal liability. They can also limit a partner’s control of the business, Limited partnerships can get quite complicated. Records, agreements, filings with the state, and more must be fastidiously kept, allow partners to limit their own liability for business debts according to their part of ownership or investment by also limiting an individual partner’s control of the business.

Corporations

Corporations go back to the East India Company in 1600. A corporation has the flexibility to allow the shareholders (owners) to attract outside capital and hire managers that don’t need not have any ownership, or claim of ownership, in the business.

Instead of becoming a full-blown corporation, there is the choice of ‘electing’ S-Corporation status. This may be particularly advantageous for closely-held businesses. S-Corporations, like partnerships and Limited Liability Companies allow for passthrough income and taxation. This eliminates one of the disadvantages of corporations.

An attractive advantage of any form of corporation is that it limits the shareholders’ liability to the amount they have invested. Profits and losses belong to the corporation. Dividends may be paid and may have tax advantages, Personal assets are never exposed to the liabilities of the company. Moreover, ownership can usually be easily transferred.

A major disadvantage is probably obvious – it’s complicated and time consuming to form a corporation. There are more regulations to be followed. Income is taxed twice (but not for an S-Corps). A potential negative for owners thinking of forming an S-Corps is that only individuals (as opposed to other entities) can be owners. In some situations, this is a deal killer.

Business Conversions Considerations

It’s an unfortunate fact of business life that sometimes the majority owners of a closely held company do not act in the best interest of the company or shareholders. Sometimes this is manifested by a recognizable business tort, a wrong perpetrated by a majority owner that adversely impacts your ownership rights and equity – such as a conversion of the company’s business property to personal.

Here are some key considerations regarding minority shareholder rights and the conversion of property in a closely held corporation:

• Improper asset transfers - Majority shareholders could improperly transfer valuable corporate assets to themselves for personal use or benefit. This constitutes conversion of corporate property.
• Derivative lawsuit - A minority shareholder may file a derivative suit on behalf of the corporation to seek return of converted assets and damages.
• Piercing the corporate veil - If corporate formalities are not observed, minority shareholders may be able to hold majority owners personally liable for conversion.
• Corporate opportunity doctrine - Majority shareholders diverting a lucrative business opportunity from the company to themselves personally is problematic.
• Burden of proof - The minority shareholder bears the burden to prove the property belonged to the corporation and was converted without authorization.
• Damages - The minority can seek recovery for actual losses and lost profits resulting from the property conversion.
• Equitable relief - An injunction can be obtained to prevent threatened misappropriation of corporate assets by the majority owners.
• Accounting for converted assets - The can demand an accounting for corporate assets wrongfully taken by majority shareholders.
• Director conflict of interest - Directors affiliated with majority owners face a conflict if asked to approve transfers that benefit the majority.

What to Do If You Think Your Majority Owners Have Converted Property

First, do not believe anything you read online, or listen to someone who tells you that the Texas Supreme Court did away with Shareholder Oppression lawsuits. The Court merely limited some of the basis for bringing a Shareholder Oppression action. There are still many avenues to relief still available, particularly where the majority shareholders have made decisions that are not In the best interests of the business. Don’t wait. If you think your shareholder rights have been trampled on don’t hesitate to call.

Don’t hope that things change, don’t let a matter fester, don’t try to solve the problem yourself through emails and letters and not-so-calm-conversations. Contact us. The earlier you so, the better, there are deadlines for every legal action. The longer you wait, the fewer your legal options.