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How do I protect my intellectual property when withdrawing from an LLC?

Elkridge, MD |

I have put almost two years into developing an ecommerce website. My partners have done very little to help me. I now realize that I will be the only one doing all of the work and I am sick of it. We have not earned any income from the business as of yet. I would like to withdraw from the LLC but I don't want my partners to profit off of my creative ideas and hard work. What options do I have to protect my ideas and hard work?

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Attorney answers 5

Best Answer
Posted

Have you assigned the source code or any of the intellectual property components of the stie to the LLC? If not, in all likelihood title to that IP is still vested in you, which would allow you to walk away with all source code, etc. It might be easier to convince your fellow LLC members to take a more modest share and just be silent, but if you want to separate completely, then you will need to take all of the IP with you.

Ideally you would have the LLC assign any interest it has, though it may have none, to you and that would be the end of it. However, your claim to the source code, etc. may be solid.

Of course, more details are necessary to give you a cogent answer. I am, of course, happy to chat with you about the matter.

Kindest regards,

Ken
Admitted in MD, DC, PA, OH

Asker

Posted

The LLC does not address the IP components. In addition, the LLC does not even have the current ownership percentages. The software was contracted out, but the idea behind the website plus certain features of the website were mine. As far as I know, there is no other website that functions like this one. I have tried to get the other members to take a more modest share, but they see the money potential and they won't budge.

Kenneth Allyn Sprang

Kenneth Allyn Sprang

Posted

Who has the source code, the outside contractor? Has the contractor assigned the code? Is there any extant operating agreement? Title to the code likely is held by the outside contractor unless assigned. Is there any operating agreement? I am happy to chat with you to get more information and discuss your options. if you wish representation going forward after our call, I am happy to help. You can force dissolution of the LLC in court, but then the court will have to allocate the assets. That means putting a value on the IP, etc. and is a bit of a game of chance.

Asker

Posted

I have the source code as well as the outside contractor. The software developer was obtained through a freelance website through which all monetary payments and correspondence are made. I would have to read the contracts of the freelance website to see whether we have sole ownership of the code.

Kenneth Allyn Sprang

Kenneth Allyn Sprang

Posted

As a rule of thumb, the developer owns the copyright to the code until it is assigned. You may wish to reach out to the developer.

Posted

Whether you can do anything really depends on the language of the operating agreement for the LLC. There should be a section that specifically discusses ownership of intellectual property rights, which -- ideally -- would discuss what happens to those rights in the event of a breakup or dissolution of the LLC. Typically, the IP belongs to the LLC, not to the member who contributed the work by designing the website, writing the code, etcetera, but perhaps your operating agreement says otherwise.

If the LLC's operating agreement is silent on those issues, then you need to go see a local IP attorney (not the LLC's attorney) and explore your options.

Asker

Posted

There is no section that discusses IP rights. The operating agreement is very simplistic and comes from legalzoom.

Robert Scott Lawrence

Robert Scott Lawrence

Posted

If part of your contribution to the LLC was the IP -- e.g., if the deal with your partners contemplated that you would contribute the site design -- then you are going to have a difficult time gaining sole control of what you created, absent any agreement by the other members. Although ordinarily the copyright vests with the creator, if you are employed by the LLC (e.g., have a salary, take a draw), or your agreement calls for such things when the LLC makes a profit, then the LLC has a good argument that the IP belongs to it, not you. This is exactly the opposite of what the outcome would be if you were hired as an outside consultant to design the site -- in that case, you would own the IP, and ordinarily would assign and/or license it to the company.

Asker

Posted

I guess I had no idea that I would be doing all of the work when I signed on as a partner. I was duped. Is there any way that I can get royalties or future compensation for my input?

Posted

Geting into an LLC is easier than getting out of it, and as pointed out, the proceeds of your creative ideas and hard work isn't yours anymore, it belongs to your LLC.

You presumably own a fractional membership share of this LLC, and if your LLC has an Operating Agreement, it should spell out how a member can withdraw, and how they can get paid for the value of their share.

Right now the value of the LLC and its assets is all speculative because the work hasn't been turned into a product and monetized yet. You're going to have to see an IP lawyer to dissolve this LLC and work out a solution for ownership to the IP rights. That may require you to buy out your co-members and get their assignments of all rights to the IP.

PLEASE READ THIS BEFORE YOU COMMENT, EMAIL ME OR PHONE ME. I'm only licensed in CA. This answer doesn't make me your lawyer, and neither do follow-up comments and/or emails and/or phone calls, and you shouldn't expect me to respond to your further questions if you haven't hired me. We need an actual agreement confirmed in writing before any attorney-client relationship is formed. This answer doesn't constitute legal advice, and shouldn't be relied on, since each state has different laws, each situation is fact specific, and it is impossible to evaluate a legal problem without a comprehensive consultation and review of all the facts and documents at issue.

Asker

Posted

From what I can understand, the LLC states that I am entitled "to a distribution in an amount equal to such member's capital account". Since we have not earned any income, I am guessing that it is the monetary amount that I invested into the company. Is that correct?

Posted

As noted above, your operating agreement, if you have one, should guide you on how you could withdraw as a member from the LLC. However, you might want to consider buying the other two out. If the LLC has not earned any income and keeping it in good standing will cost money, the other members might be willing to sell their interests to you.

If you are able to get that kind of agreement, you should also have everyone sign mutual releases of all claims that may have accrued against each other.

You should definitely consult with counsel who can comment upon the LCC situation and the disposition of the IP.

LEGAL DISCLAIMER: Please note that this comment does not constitute legal advice nor has an attorney-client relationship been created.The law may vary depending on the state in which you reside or the jurisdiction where the activity took place. This comment is intended only to give some direction in which to seek further guidance.

Posted

I agree with Attorneys Lawrence and Koslyn. The LLC is a separate entity that you gave your efforts and resulting work to in the hope of eventually recovering a profit. Although more facts are needed, under the facts you've provided you just may be -- pursuant to copyright law at least -- an "employee" of the LLC and, as such, the copyrights and trademarks and trade secrets and trade dress and know-how and computer code that makes up the LLC's website belongs to the LLC. Not you. You need to speak with an intellectual property attorney licensed to practice in your state before you tell the other LLC members that you want out. Good luck.

The above is general information ONLY and is not legal advice, does not form an attorney-client relationship, and should NOT be relied upon to take or refrain from taking any action. I am not your attorney. You should seek the advice of competent counsel before taking any action related to your inquiry.

Asker

Posted

I guess I should have done my homework before getting into this. Thank you for your input.