May 7, 2010
Setting Up A "Venture" Limited Liability Company The Right Way
Setting Up A "Venture"Limited Liability Company The Right Way By Cliff Ennico www.creators.com "Three friends and I are going off on our own to set up an informationtechnology consulting business. We want to form a limited liabilitycompany for this business, but we want it to be flexible enough that wecan grow and attract venture capital investors. What are some of thethings we should be thinking about legally?" Limited liability companies (LLCs) are very easy to set up when thereare only one or two people involved in the business, or the business isnot likely to grow rapidly (for example, a family owned retail orservice business). When people who aren't related and don't know eachother very well go into business together, things get a bit morecomplicated. Here are some of the things you and your friends should discuss beforecommitting to this venture: Who Will Own This Business? Right off the bat I see a problem --thereare four of you. If you divvy up the LLC ownership equally, you'resetting up a situation where if two of you want to "zig" and the othertwo want to "zag", the LLC cannot function. We lawyers call that"deadlock". Try to divide up the equity so that one or two of you own51% or more of the LLC ownership shares (called #147;membershipinterests#148;). Who Will Run This Business? You should consider forming a "boardofmanagers" to run the LLC business, similar to a corporation's board ofdirectors. Three of you should serve as the "managers" of the business to avoid"deadlock" situations. So the fourth person won't feel left out, youcan add a "supermajority voting" clause to your LLC Operating Agreement(similar to a partnership agreement) requiring that the four LLC ownersunanimously approve major decisions affecting the LLC business (such asthe admission of a new member, a merger or acquisition, or investmentsover a certain dollar amount). Your lawyer can provide you with a listof common matters that are covered in a "supermajority voting" clause. Capital Contributions. At some point, your LLC will needadditionalinfusions of cash. If you do not make these "pro rata" (in proportionto your respective LLC ownership percentages), then your percentageownership of the LLC will change depending on the amount actuallycontributed by each member. To keep this from happening, consider aclause in your LLC Operating Agreement requiring that any additionalinfusions of cash be made in the form of "loans" - that way if one ormore members cannot pay their fair share, the others can make up for itwithout changing the ownership of the LLC. Compensation. Since all of you will be working in the business,youwill want to make withdrawals from the LLC checking account from timeto time to pay your living expenses (called "draws"). Work out aformula now as to how each of you will take "draws," or put a provisionin your LLC Operating Agreement requiring the members to voteunanimously on "draws" each month. Voluntary Withdrawal. If one of you has trouble meeting hisobligationsto the LLC, or comes under family pressure to "get a day job" if theLLC business isn't providing him with a decent living, you will have tofigure out a way for him to "withdraw" from the LLC. You should agreeto pay him fair compensation for his LLC ownership interest if hewithdraws, but make sure (1) the LLC pays him over a period of five to10 years so as not to burden the LLC#146;s cash flow, and (2) he or she isbound by a noncompete clause not to steal business from the LLC orotherwise compete unfairly with the remaining members. Involuntary Withdrawal. If one of you dies, becomes disabled, isdivorced from his or her spouse, or files for bankruptcy, there#146;s achance a "stranger" will end up owning a piece of the LLC. Have yourattorney draw up a "buy-sell" agreement requiring the LLC to purchasethe ownership interest of any member who dies or becomes disabled, orany person who acquires a piece of the LLC in a divorce or bankruptcyproceeding. As soon as possible after you form the LLC, the LLC should purchase"key person" life insurance and "disability buyout insurance" on eachof the four owners (or those owners without whom the business couldn'tfunction). That way, if one of you dies or becomes disabled, theproceeds of the insurance policy can be used to purchase his or herownership interest without impairing the LLC's cash flow. Watch Out for Noncompetes. Since it appears some or all of youareleaving "day jobs" to start this new business, make sure you haven'tsigned any "noncompete" or similar agreements with your currentemployer. Even if you haven't, try to avoid contacting your employer'scustomers, suppliers or employees for at least a year after you startthe new business. Cliff Ennico ( cennico@legalcareer.com )is a syndicated columnist, author and former host of the PBS televisionseries 'Money Hunt'. This column is no substitute for legal, tax orfinancial advice, which can be furnished only by a qualifiedprofessional licensed in your state. To find out more about CliffEnnico and other Creators Syndicate writers and cartoonists, visit ourWeb page at www.creators.com .COPYRIGHT 2009 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS SYNDICATE,INC. Permission granted for use on DrLaura.com.

Posted by Staff at 1:52 AM