How best to assume more control in a LLC?
November 9, 2010 10:02 AM   Subscribe

How best to assume more control than the other members of an LLC?

I have started a member-managed LLC with two other people. We have not yet signed an Operating Agreement, but that is on the horizon as things are starting to come together.

As we have begun working together, it's become clear to me that my skills, knowledge, experience, and capability pertaining to our business outweigh those of my partners.

Not only am I having to do all of the organizational operations to make the business function as a business, such as the finances, but I am finding that I have to teach my partners about both how to do their jobs (i.e. the technical aspects of what we do) and how to develop their responsibilities into the formalized processes that will allow us to expand and grow as a business.

It seems that the scenario would make more sense if I simply did not have them as partners in the LLC and instead just hired them as employees, except that I haven't the capital to do that. It will take some to-be-determined timeframe before the business will start generating enough revenue for anyone to actually get paid and because of the nature of the business it requires virtually no up front expenditure as long as we aren't paying ourselves.

So I feel like making them partners has been a good way to motivate them to be a part of the business without anyone getting paid now, with the expectation that if/when the business becomes successful we will all start getting paid. However, due to the disproportionate experience, I feel like I should have more control over the overall management decisions, and ultimately, when we are successful, get paid more, at least until my partners have made enough improvement and gained the experience necessary to operate a little more independently.

I am looking for advice about how to, first off, approach this with them in a way that doesn't undermine the skills and capabilities that they do bring to the table, but also more importantly, how best to actually go about structuring the LLC in such a way that allows me this higher level of control and authority.

If I haven't included enough information, or you have any questions at all, please do not hesitate to contact me via email at: - I would love to discuss the details further, if anyone is interested!
posted by anonymous to Work & Money (8 answers total)
I "think" you can issue shares of ownership for the business in your operating agreement. IIRC the number of shares in basically irrelevant. You could issue 100 shares, 10,000 or 543,872 shares and it won’t change the cost of filing the documentation or creating it. I don’t think you need to do more than say in the operating agreement something to the affect of: Person 1 was issued XX number of shares, person 2 was issued XX, person 3 was issued XX all at a value of XX per share. You get to the per share price by taking the total amount of capital that everyone has contributed divided by how ever many shares are issued and then issuing shares in proportion to your financial contribution.

If you do it this way, the value of your ownership stake in the company changes in direct proportion to your initial contribution. In other words, whoever put the most money in, gets the most money out. If you contribute 51% of the capital, you own 51% of the shares and 51% of the company and will have total control. You can’t buy out the other partner’s ownership unless they want you to but you can tell them what to do and how to run the company (including firing them as employees). I think you could also specify that the shares going to the other partners are non-voting shares which would give you total control even if you only owned 10% of the shares.

I’m not really sure how you would go about contributing less financially but get paid more than the other owners, I think it can be done, I just don’t know how.

I could be completely wrong about all of this, I’m by no means an expert but, at the least, these are questions that you can ask someone like a lawyer or accountant who specializes in this stuff. Or, some other metfites will correct/confirm my ideas for you.
posted by VTX at 10:37 AM on November 9, 2010

IANYL. You really need to hire an attorney to assist with this. LLC's are governed by their operating agreement and offer all sorts of flexibility on ownership and management, but a poorly drafted operating agreement will be a nightmare to sort out later. There are also tax implications involved because this is a pass through entity, and because it sounds like ownership could be based on sweat equity as well as cash.

Find a good business attorney. You'll also need to consider whether that attorney represents you or the LLC, because it sounds like your interests may not be aligned with the LLC as currently set up. Your attorney can discuss the particular conflicts of interest in detail with you.
posted by Sukey Says at 11:02 AM on November 9, 2010 [2 favorites]

You've gone into a partnership and are now having second thoughts about fairness.

But, could you do this partnership without your partners?

Yes, there are ways of changing ownership amounts, but why would you want a few percent more. Would that help the success of your business?

Consider that your partners would likely be strongly demotivated if you try to demote them. Would the business still work?

You want them to work for free, as you don't have capital. That means giving them equity. But switching from equal shareholders to you as boss, if it makes sense, will require you to persuade them of this. I don't mean in the legal sense, but in the sense of what works for the company. So it's got to be about the company rather than what you should have.

There are also other ways to run the company besides having the majority of stock. In fact, most people who run companies (CEOs) are not majority owners.

Know when to share stock. It aligns people's interests. Control is not the be all and end all, maing the company work is.
posted by zippy at 12:30 PM on November 9, 2010

Having been part of a equal 3 way split LLC for many years, you need to figure this out now and fast. If you're not comfortable with the split you initially agreed upon, you need to have a discussion with the other members of the LLC now and get it out in the open. You can re-distribute shares if everyone agrees, but if you plan on making a significant amount of money in the long run you need to get a lawyer involved, and likely a good CPA.

You should immediately have a discussion about ownership and entitlement with your other partners and come up with some rough 2-3 paragraph 'this is our intent' deal that everyone signs. It may not stand up in court in the long run, but it'll be enough until you can get a more formal agreement in place. Then you get a lawyer involved who will likely give you boilerplate articles of organization which you can then tweak to your liking. Things to consider are how members leave the LLC (Do you have the option to buy them out before they sell their stake? If so, how is it valued, do you find an independent 3rd party? Can you finance the buy-out? Are all internal disagreements required to go through mediation before court? What happens if someone dies?) and what happens when there are disagreements.

The only way you can make decisions by fiat is if you own more than 50% of the company, but even then if you start making moves that damage their ownership value or perceived ownership value, they can take you to court.

If you're having this much of a concern this early, you may want to reconsider the LLC entirely, since it's likely your concerns will only grow stronger. If you want an arrangement with voting and non-voting shares, an LLC probably isn't the best option for you. There are tax implications as well, and you should talk to a good CPA before you do anything.
posted by jeffkramer at 12:40 PM on November 9, 2010 [2 favorites]

Yeah...figure this out quick. See a lawyer for options. There are insanely large numbers of ways to structure a company and award ownership. Do your friends see you are the major contributor? If so, simple have an honest discussion with them. Can you not do it without them? How about setting up an LLC agreement where ownership shares is granted based on objective goals. Like "when your like of business generates X amount of revenue, you get Y percent" or "when task M is accomplished, you get N percent". As mentioned, if you question their abilities, can you grant non-voting shares.

See a lawyer.

Also remember that you will hopefully want to bring in new talent at some point, so some sort of fixed allocation of percentages isn't a good idea. Have a flexible agreement that lets you give new blood a piece of the action. And, trust me on this one, don't give up more than 50% + 1 share of you company. Been there, done that.
posted by kjs3 at 2:46 PM on November 9, 2010

Agree with the "See a lawyer" approach. The lawyer will talk to you about ownership (membership interests, not shares) vs. control vs. day to day activity. The officers of a company are the ones who are responsible for day to day activity. If you have three equal owners, each is entitled to equal distributions of profits, but officers and employees can be paid differentially, based on whatever criteria you choose, before the company recognizes any profits.
posted by megatherium at 4:03 PM on November 9, 2010

Meant to say, "the officers and employees" of a company. I am assuming, given your description, that they are the same.
posted by megatherium at 4:14 PM on November 9, 2010

nthing the "see a lawyer" suggestion. You need a business lawyer to explain how all of this works in your state.

No idea on approaching the other shareholders with this issue, but if you're the one with the most applicable skills, is there a chance they'll just naturally defer to you in terms of decision making?
posted by J. Wilson at 4:16 PM on November 9, 2010

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