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    3 Replies Latest reply on Mar 27, 2009 12:18 AM by golfheaven

    Regulating a partnership

    CodeMaster200 Newbie

      Hi Folks;


      I'm about to start a business, which will be a partnership between me and two old friends.


      I'm lost with a lot of questions in my mind and as i saw on a few forums some people use to give a simple answer for some questions:

      "You have to ask a lawyer..." and the rest you know.

      Before somebody says that I will let you know: "Of course we will use legal advice and a lawyer will handle all the documentation and the company's formation". So, my purpose here is get some "general knowledge" from people ho has some experience to share. And I always like to know a few things about the subject, before i go talk to a lawyer, it helps a lot.


      Enough talk, here is the scenario and my questions:

      I'm a software engineer and I have a project (software) I'm working on for about 2 years and now i don't have enough resources to finish it. I spoke with a friend and he offered help. After that, another friend heard about the opportunity and invited himself to help.

      Here is how things will work:


      A) We will start a LLC as 3 partners (a LLC appears to be the best option, I'm not sure).
      B) The first friend (FRIEND A), which I called to help, will deposit $25K on the company's account.
      C) the second friend (FRIEND B), which invited himself, will deposit $50K on the company's account.


      D) I wont put any money but I'll bring my project, work full time to finish it and after it's finished, keep working full time to support, maintenance, etc.
      E) The other two partners rules are simple: they are two guys putting money on a business and expecting some profit. They will never do anything.
      F) We will be diving the company in 3 equal parts. Each one of us owns one third of the company.
      G) The reason we are dividing in equal parts are:

      I already have a few thousands and 2 years invested on it. The other two guys just agreed that it's fair. Maybe because one was invited and the other one "found us" talking about it and... you know. Anyways, we agreed and we are all happy with it this way.
      H) I'll be receiving a monthly payment for my service (a full time job at the company). At the end I'll have my monthly payment plus my one third of the comapny.


      1) Is that a common scenario? Share equal parts between people investing a different amount of money even though it's ok for us?
      2) Is that ok for a partner who works full time for the company (me) to receive a "monthly salary" + my share of the profits? By the way, how do you call it? I'm pretty sure the correct term is not "salary" because i'm one of the owners, not an employee.
      3) I thoug something like: As soon as the annual sales reach $500K we will start distributing the profits quarterly. Is that how it works? How people decide when each partner starts receiving he's part of the profits?
      4) If at some point we need more money and decide "to sell" 10% of the company to another investor. How does it work? We have to subtract this 10% from one or all of us? Looks obvious.
      5) Is that ok to antecipate something like: If on the 5th year we are not making (let's say) $1 Mil year, we will dissolve the company and also, antecipate what part of the assets will be available for each partner?
      6) And finally... where we will include all this information? It will be on the documents the lawyer will be provide when he form the LLC for us? Or... do we


      have to form the LLC first and then talk about these things on the first meeting and have it on the Minutes (kind of weird)?

      As you can see i'm totally lost and looking for directions, and of course, just doing some research before contact a lawyer.
      I really appreciate any comments.

      Thanks in Advance.

      New Jersey
        • Re: Regulating a partnership
          Lighthouse24 Ranger
          Answers to some of your questions . . .

          1) Not that common in my experience.

          2) Yes, you can receive "guaranteed payments" which are fixed and unrelated to revenue, and considered a business expense for the LLC. The bad news is that those monthly payments will be ordinary income for you, so what the company saves on FICA, you'll more than make up for paying self-employment taxes. There are also some other potential pitfalls with guaranteed payments that could come up if the company doesn't make a profit.

          6) Your operating agreement will spell this out -- as well as the procedural ("how does it work?") aspects of your questions 3, 4, and 5. Actions like cash distributions, adding a new member, selling an existing member's shares, etc. can get complicated with an LLC, so the best thing to do is lay out the various scenarios of what could happen with the company and its members in the future, and then ask your CPA a lot of "What if . . .?" questions about the implications of each. (There are countless numbers of LLC members that didn't think this through up-front, and eventually find themselves "frozen" -- unable to do anything relative to guiding the company in the right direction -- because the "boilerplate" operating agreement they downloaded from some website doesn't legally allow them to do what needs to be done.)

          Hope that helps a little. Best wishes.
          1 of 1 people found this helpful
          • Re: Regulating a partnership
            DomainDiva Ranger
            After the lega-eagle work and contractual things are done...please remember:

            Love is is business. Keeping THAT in the forefront will go a long way to making sure the partnership adheres to good business practices. Friends CAN do business if they keep the love and business separated.

            My husband and I do a lot of business together and we succeed by remembering love is love, business is business.
            • Re: Regulating a partnership
              golfheaven Adventurer
              Make yourself the managing member ( To many chiefs not enough indians ) That way you make all decisions on a daily basis.

              Your lawyer should write the operating agreement with your input only. Then negotiate on final draft.

              Then you will be comfortable on membership agreement. Keep in mind of potential investors for second round and develop a sound exit strategy.
              1 of 1 people found this helpful