I'm leaving a startup, am I responsible for money taken out of the business account?
I have been working on a startup for 5 months. The startup has some outside investment and money in the bank. My co-founder is CEO and never set up payroll. Instead, he had us taking money directly out of the business account with the intent of rolling this over into payroll. During this time, I did not take much at all from the business and actually went into debt because I believed we would raise money. When I came to the conclusion that my co-founder was not really working and was unreliable, I left. But before leaving, I took money out of the business to compensate me for what I would have been paid had he set up payroll. We never explicitly defined in writing what this pay would be and now he is trying to say that it would have been much lower than I ever would have agreed to and he is demanding I pay it back. Since there was no written agreement, am I in any way legally responsible because I took this money directly out of the business account and not through payroll?
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So did you guys not ever discuss at all, how much you *should* be getting paid? – rbwhitaker 11 years ago
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Yes, we did discuss. And the amount I took was entertained. It is the minimum amount required for me to live, so I would have needed to go into credit card debt to continue working. There was a scenario where we were to be made equal equity partners and in this scenario, I was ok with going into debt and taking less pay, but obviously we didn't go down this path. – David P6 11 years ago
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Was this an LLC/Limited company etc? – Bhttoan 11 years ago
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This was a c corporation. – David P6 11 years ago
2 Answers
I would suggest you get a lawyer. It sounds like you had some embezzlement going on in your company. Although everyone seems to have participated, it is embezzlement nonetheless. I also suspect that payroll taxes were not paid. Big problem. If this explodes - you'd better be well covered. Do not discuss this with anyone unless client-attorney privilege applies. Anonymous Internet forums included, you'd be surprised how easy it will be to find this post once one (the outside investor?) knows what to look for, and tie it back to you.
Get a lawyer. Fast.
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Embezzlement? We have a company lawyer and he told the CEO that the money taken out could be rolled into payroll and we would pay payroll taxes on it. – David P6 11 years ago
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@DavidP6 first - *the money taken out could be rolled into payroll and we would pay payroll taxes on it.* that never in fact happened, had it? Second - I find it hard to believe a (decent) lawyer would ever say that. If so - I smell malpractice. But have you actually heard the lawyer say it? Do you have it from him in writing? Because I seriously doubt that... What country are you in anyway? It may be that you're in some place where rules are less strict that in the US or Western Europe... – Littleadv 11 years ago
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Sorry David but I agree totally with littleadv - this does not look good on anyone regardless of what was discussed or agreed – Bhttoan 11 years ago
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The CEO told me that the lawyer said that. I think the lawyer was under the impression that money had been taken out as a loan and could then be rolled into payroll, but the CEO never formally signed any loan documents. I am in US. I know it doesn't look good, but I just want to figure out the best way forward. I am leaving the company, so it seems the company could pay me the money I received as a contractor? I am mainly concerned about my liability as an individual. – David P6 11 years ago
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@DavidP6 if you're in the US then my advice reiterated - **get a lawyer**. Your liability is not only as an individual, but also as the officer/principal of the company (unless your stake was at really low percentage). You can get sued not only by the US/State government (which is likely), but also by the third-party investor (which is **very** likely). The corporate veil will very likely be pierced in this situation, and it may get very very nasty. – Littleadv 11 years ago
You use to have access to the accounts, so there must have been some agreement made that allowed you to take money. Now you've left the company and have no control over how they are going to do the accounting, payroll etc.
Right or wrong, they could declare you as a contract worker. You will have to handle your personal taxes a little differently if this is the case.
The entity that funded the company may have provisions in the agreement with your company on what could and could not be done with the money. While you were a partner, you may have broken a covenant in this agreement. At the least they have an expectation of following sound accounting practices.
Get a lawyer and hope you can come to some agreement.
