When Are E-Mails Describing You as Partner and Drafts Enough to Make it So?12 / 07 / 2020
Funsch v. Funding, 2020 N.J. Super Unpub. LEXIS 2321 (12/3/20)
This case presents an interesting, but important question:
How much needs to be said in an e-mail and in draft operating agreements being floated around to turn the classification of an employee into an interest owner in a LLC?
The facts of the case center around a situation in which Mr. Billy Procida, a 100% owner of a real estate investment company known as Procida Funding, LLC then hires Mr. Kyle Funsch to work as a W-2 employee in 2009. Things go well, and because of Procida's mentoring of Funsch, millions of dollars are brought in. In May, 2011, Procida sends an e-mail to Funsch and another employee, John Mullane. As Funsch sees it, the 2011 e-mail grants to them the right to each receive a 12.5% share of the Company's net earnings because they were promised this ownership share of the business. While LLC operating agreement amendments were floated around in support of their admission, they are never executed. Then, by December 2015, Funsch stops working for the company, but in doing so, sues to recover compensation and rights with regard to this interest. Funsch also claims that Procida held him out at times as a "partner" in e-mails sent to others. He also claims that SEC filings show that Procida considered him to be a principal with the company. Funsch even stated at one point, "I want to admit Funsch and Mullane as straight up 15% partners, effective January 1."
Unfortunately, for Funsch, he did not contest the fact that throughout this time, he did not demand to receive a K-1 instead of a W-2. As the court viewed it, this, and the fact that there was a refusal to sign the operating agreement amendments, meant that mere e-mail references to "partner" or the fact that the member referred to them as partners was not enough.
As this case shows, it is critical for W-2 employees believing themselves to be a "partner" (member in a LLC), or owning equity in a company, realize the power of the Form 8082, Notice of Inconsistent Treatment. It can and should be filed whenever one believes that they SHOULD have received a K-1 in a given year. Furthermore, a similar rebuke of the W-2 as issued should be made, requesting that it be corrected. If the company refuses, then the W-2 should be contested, using Form 4852, Substitute Form W-2. For more information, contact Mr. Tufts at 407-647-7887.