Balancing Business Divorces Brilliantly

Why did the bookkeeper break up with the partnership? Too many outstanding issues and not enough balance! But don't worry, our very balanced Bookkeeper Mensch, Paul Rosenblum, is here to share how to avoid such issues. He talks about five LLCs that hit major bookkeeping snags because the partners weren’t communicating and didn’t have clear roles. They shared QuickBooks subscriptions, payments were late, and the whole thing spiraled into a legal mess. What could have been done differently? Paul's got some grounded and practical recommendations for sure!

Transcript

Episode 44

As I record this episode close to the middle of September 2024, life is almost back to normal in my bookkeeping practice. After vacations, jury duty, spending days on the beach and at the pool, and wearing shorts to work (sometimes), now that clients are back in their routine (and I am too), client situations will be abundant for me to share with you. I’m Paul Rosenblum.  

As a reminder, please check out the YouTube channel at youtube.com/@bookkeepermensch and remember if you leave fan mail, leave your contact information so that I can write back to you.  I have been a bit slow in writing back since it has gotten busy with the September and October 15th deadlines upon me, but I promise, I will get back to you.  

To coin a phrase that the actor William Conrad used to say at the beginning of the Quinn Martin TV shows in the 1960’s – (and I’ll do it in my best William Conrad voice) “Tonight’s Episode: Divorces.”  (You can google that if you’d like) 

With that said, I’m talking ‘Business Divorces’, so don’t worry, we are not breaking up any marriages on this pod!

I had an EA aka (Enrolled Agent), able to file tax returns without being a licensed accountant, (and I talk more about the hierarchy of tax preparers in episode 38), -- he referred a new client of his to me back in 2022.  They had started 5 different LLC’s that were all partnerships in the same field, so they were all inter-related entities, however, with different EIN (Tax ID) numbers. 

The episode on Feb. 22 of 2024 talks about partnerships, focusing on distributions and taxes.  This episode will focus on partnerships from another angle— “Getting along”. 

Since the tax preparer is someone who I work routinely with year ‘round, of course, I decided to take up the bookkeeping responsibilities, even though it was slightly out of my comfort zone because of the time it would take me every month. I have mentioned before that I have so many companies that I do bookkeeping for, and the only way for me to get them all done every year is if many of them are small.  Some companies take me less than 30 minutes a month for me to complete, some companies take me 2 hours a YEAR for me to finish, so I am very careful how I work and know the order of priorities throughout the year and I have an understanding of which clients want their books every month and those clients who just ‘want it done before the March/April deadlines for tax filings every year.  But as usual, again, I digress.  

So, in March or April of 2022, I started doing the bookkeeping for these companies.  5 different companies on QuickBooks online. As I started doing the bookkeeping, I noticed that one company was paying for all 5 subscription fees every month for QuickBooks online.  That’s wrong. Each company, since they are separate entities, has to pay for the online subscription separately. (So I had to set up accounts on the balance sheet called (Loan To/From Affiliate) in all companies so that I can show the separate monthly fees for the online accounting software separately).   I had to go into the POS software, and run sales reports for each of the 5 entities, and make the appropriate journal entries to post the sales to the books correctly. I had to have a bank ID and password, and a password to the POS software  The five entities were time consuming to get them all done, but they were finished on time to the satisfaction of the tax preparer, even though he had to make some adjustments because there was very little communication from the partners of the businesses.  

Almost from the beginning, if I had a question, I was never sure of who to email – usually one partner has the responsibility of running the business from the accounting end, and the other partner runs the business from the customer end.  I still, to this day, don’t really know who had responsibility for what.  One partner was pretty responsive, the other partner not so much. They have always been slow payers.  At one point, I had to wait almost 4 months to get paid, but I had patience because the tax preparer told me that they were good for it. And then one day I had a short phone call with one of the partners and he told me that the partnership was having problems and that he was the main person to talk to about accounting matters. He was handling paying invoices, answering questions about expenses, and affiliate transfers, and anything else that pertained to my work.  He asked me at one point not to even call the other partner.  I continued the 2022 books to the end and told the tax preparer that they were done and ready for him to work with.  

In March of 2023, I finally got paid (one partner asked me to combine all the unpaid invoices for all the entities into one invoice, and he would pay me from there).  I knew that was wrong, and called him on it, but he said that’s the way it has to be.  So, I did as he asked. I then was told that at least 3 of the entities were closing down, and I had the understanding that they were going to bookkeeping in-house on the other 2 entities.  Recently, at the very beginning of September, right after Labor Day, the tax preparer called me and told me that he wanted to do the tax returns for these two entities, and nothing was there after May of 2023.  He was almost in a panic. I told him the story, and he made a call to the partner who dealt with the accounting.  He claimed it was a misunderstanding and he liked me and absolutely wanted me to continue the bookkeeping. When the tax preparer told me that, I couldn’t walk away.  (Well, I could have, but you probably know me well enough by episode 44 that you know I wouldn’t and couldn’t).  

Hence, the need for written engagement and dis-engagement letters (which I have never done, by the way).

I had 9 months of entries to do in a very short period of time. 

However, in June of 2023, their bank merged with another bank (after I stopped working on their books because I thought they were taking over), and I discovered that I the ID that I had for the bank before it merged didn’t work so I couldn’t get statements that I needed.  Since it’s a different bank, the bank feeds coming into QuickBooks online had stopped in May of 2023 as well. And the bank, I later found out, doesn’t have transactions going back that far to download, even in Excel format. 

Manual data entry it was. It took me two full days typing at lightening fast speed to enter and reconcile 9 months of bank statements for each company.  There was something in the neighborhood of 2100 transactions to be entered. I was able to get them all done and by the time you are listening to this episode, they would have been filed on time. 

Now, to the main point of this episode. Remember Divorces?.  How does a year and a half go by without EITHER partner calling me about the books?  Did they not notice that their books weren’t being done?   Were they running the businesses blind?  Did they not notice that they weren’t getting invoices from me every month?  I don’t really know, but had a talk with the tax preparer, and he called the partner who handled the accounting and had a private conversation with him, and then conferenced me in to speak to both of them about the situation.  I knew that they were having problems, but it ends up that there is upcoming litigation between the two partners, and they aren’t speaking to each other at all. When we had the conference call with the partner not handling the accounting end, I read him the riot act on the phone.  I asked him how does he go through a year and a half without talking to his bookkeeper, even if he isn’t talking to his partner?  Are you still a partner of the business,? I asked him.  Don’t worry, the tax preparer called me after the conference call and said that I read him the riot act but very professionally. Since then, I have been speaking to that partner every week. Case under control. (at least for now)

It ends up that the partnership is 50/50. Why would two people (friends or not) go into a 50/50 partnership without a very carefully written operating agreement spelling out what each partner is responsible for?  If the operating agreement isn’t specific about responsibilities, these are exactly the problems that you will probably run into.  If one partner is 51% and the other is 49%, that’s another way of diffusing situations like this.  Even in a 50/50 partnership, in the operating agreement, one person makes decisions, about day-to-day operations, and the other partner can make decisions about the accounting, funding, and other things.  But these partners were 50/50 without a good operating agreement.  They now hate each other, not speaking to each other, and are in the middle of litigation. What a mess. And the accounting had been virtually forgotten about. I have gotten one short email from the partner who is handling (or not) the accounting since all of this happened at the beginning of September.  I have had several emails and several conversations with the other partner.  And of course, I can’t take sides here – I am just trying to do the bookkeeping moving forward. But I do have to tread lightly, since the partners are completely opposite personalities. I’m sure this situation happens elsewhere, but I’m in NYC (it probably happens more here). We have a saying here in NYC – “If you see something, say something”. I’m doing just that in this episode. 

(I guess the relaxed, non-stressful feeling that I had most of the summer is going away) 

The moral of today’s story? If you have a partnership, make sure the operating agreement is very specific between the partners (and remember, it can be changed at any time if agreed upon by both or all partners), and if the relationship goes bad, still keep in touch with your bookkeeper and your tax preparer and pay their bills! 

Or if you want to avoid this particular situation all together, run your own business as a single owner LLC without investors or partners.  

I’m not sure how this story is going to end, but I have been told that we will know sooner rather than later, and I will update all of you on this whenever I hear about the final outcome. 

There’s always something going on in the exciting accounting field!  

More client stories are coming!  Email me if these stories are helpful to you and let me know any specific things that you’d like me to talk about here.  

Ramping up for the very beginning of my tax season (yes, even in September), I’m Paul Rosenblum