Jim has an amazing idea to start a new housing project. His only problem is he doesn’t have the capital. He thinks of Fred, a longtime friend who doesn’t have much business experience but has a lot of money and owns some property. He sits down with Fred and convinces him that a generous cash and property investment will guarantee him huge returns. Since Jim has the industry knowledge, he and Fred agree that they will split the net profit 50/50. Fred, trusting his longtime pal, puts up the cash and allows three of his properties to be used for the development project. Fred does not pay close attention to the documents Jim asks him to sign. He quickly signs them, eager to move forward.
Although Fred may not know much, he starts to see Jim running the business in a way that he thinks is damaging. Fred approaches Jim and demands certain changes be made. Jim tells him he doesn’t have the right to participate in day-to-day operations. The business starts to deteriorate. Fred takes the operating agreement to a lawyer and much to his chagrin, Jim is right. Fred’s limited role is that of a silent partner, only to provide capital, not to be involved in operations or decision making. A month later, he is served with a lawsuit naming him, individually. It is concerning some safety issues with one of the buildings included in the development, all of which remained in his name. Fred is incensed.
Could it get any worse for Fred? Well, it certainly could be a LOT better. Had Fred done his due diligence on the front end, he would not be catching so much grief on the back end! A simple review from legal counsel could have put Fred in a much better light. Now, he has been forced to sit idly by as the development he invested in is run into the ground and his personal assets are at risk.
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