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Is it possible to setup an LLC like a franchise and charge members for exclusive use of company's IP in a member's territory.

Tampa, FL |

I own a premium domain name and vanity 800 number that businesses would be very interested in controlling in their marketing area. I looked at a leasing scenario, but businesses I spoke with do not like being at the mercy of a leasor because they will be investing a considerable amount of money promoting the leased number and domain as their own within their territory. A Franchise approach is costly to start-up and maintain.

So what if I modified our existing LLC to accommodate a special class of members who...
- owns a piece of the company
- could vote on issues that effect their use of the IP
- pay a monthly fee to the LLC
- could sell their interest to another Member or approved third party who becomes a Member
- would not be entitled to LLC profits

OR Is a trust a better way to go?

I understand the issue fiduciary duty Charles mentioned below. How to best accomplish/satisfy this issue is why I mentioned a Trust in my original question. Any ideas are welcomed. What about security Laws... I'm guessing charging members a monthly fee creates an issue(i.e., what happens if they stop paying). Maybe a better way is to set it up as a contribution verse a fee that can be paid over time. but this approach has an end(fulfillment) date and so a fee would eventually have to take it's place to cover expenses to insure fiduciary duty is maintained. What about the condition that these special interest Members are not entitled to any LLC Profits? Does this present a problem? I appreciate any help with any of these questions as I want to be prepared to ask the right questions and choose the right attorney.

Attorney Answers 3

Posted

You need to be careful with this idea. I see potential securities laws and fiduciary duty problems lurking here.

Structuring this with a good business lawyer is essential.

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Asker

Posted

Yeah, I was thinking this is out of the norm and as Michael Said I want to do this right. Can you expand at all on your response. Iwill need to work with a lawyer on this I just want to understand where the problems exist.

Charles Richard Perry

Charles Richard Perry

Posted

Your interests in the LLC may be considered securities. Any sale of a security must be registered or fall within a registration of exemption. You may qualify for this, and you may not. In addition, you are going to be the manager. As such, you have fiduciary duties of loyalty to your owners -- and there is an inherent tension between you and the two classes of investors (where one pays a fee, and the other does not). Any decent business lawyer can expand on this.

Asker

Posted

Thanks Charles for your input, It has put me on a course to find the right attorney. Too bad you are not in Tampa.

Posted

A Limited Liability Company ('LLC') makes sense in your situation. The facts you present warrant working with a sophisticated Business Law attorney to make sure you get it right (legally and financially) the first time. See Avvo.com under Find-A-Lawyer. Good Luck on your Business!!

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Asker

Posted

Thanks Michael

Posted

I agree with my colleagues on this, yes it can be done and even yes it can be profitable. You can do a similar thing with trade names and telephone numbers. I know of someone who is doing this very successfully with residential plumbers.

Before you do this, though, you need to hire a local lawyer who practices in business and franchising to give you guideance and get it done right the first time. Do it incorrectly and you will be paying for years.

For the older ones of us here, it is like the old Fram Oil Filter commercial, "you can pay me now or you can pay me (much more) later." As Michael suggest, check Avvo for a good reference.

Good luck

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