I'm considering joining an existing LLC, but would like to know of anything I should be aware of before I proceed with that. Here is the situation:
The LLC is for a bootstrapped App start-up. I've been following the work and in contact with one of the owners the the last couple of months. They have now approached me with an offer to join their team. They are located in Texas and I am in Michigan. I would be brought onto the team with 15% equity. Operational costs are split by equity portion.
I'm interested in doing this, but of course I want to know what I am getting into legally and it's financial implications.
What questions would you recommend I ask the existing owners and what are the legalities in general that I should be aware of?My main concern here is protecting myself personally. Although, I accept that any money that I invest in the company could be lost if the company is unprofitable or goes bust, I don't want to put myself in a situation where I could lose personal property that I did not specifically give to the company for operating costs (my home, personal savings account, etc.) One thing I wouldn't be willing to do is to personally sign for any loan for the LLC. Is there anything I need to watch out for?
LLCs are governed by Operating Agreements, and other formal agreements
between the members. The Operating Agreement should control voting rights,
management rights and limitations, whether a super majority is required for
certain acts, such as capital calls which could dilute your ownership
interest or for which you could possibly have personal liability. To mention
just a few of the myriad possibilities, other provisions could allow or
disallow the members to compete, to take salaries or other distributions, or
to do business with related parties. I published a short article recently
which speaks to your questions: http://hjoelnewman.com/news-3.html. You need
all shareholder minutes, agreements, resolutions, financials, reviewed by a
business lawyer. This is absolutely essential and well worth the modest
expense. It is good that you are asking these questions now rather than
later. Good luck!
This answer is not intended as legal advice and does not establish an attorney/client relationship.
One major question is: How do you get out? Unlike a job, you may not be able to just quit. Ordinarily a member cannot quit unless the organization Agmt expressly permits it. Also, is there a buyout for a resigning member? In my view, a good OA should also permit the expulsion of a member for cause if he is not pulling his weight, but that may not concern you. Mr. Newman has a good checklist of issues. Capital calls should be of major concern, because you could have unlimited liability if the majority so chooses. This is has the same risks as cosigning for a loan to the company. Calls should be limited to a specific amount or a specific percentage, say 50% of your initial contribution, or whatever you are comfortable with. Do you also get 15% of the profits? Do any partners get guaranteed payments, ahead of profits distributions? You should consult a business lawyer with all the docs before you decide.
Best of luck if you decide to take the risks.
DISCLAIMERâ€”This answer is for informational purposes only under the AVVO system, its terms and conditions. It is not intended as specific legal advice regarding your question. The answer could be different if all the facts were known. This answer does not establish an attorney client relationship. I am admitted only in California. (Bryant) Keith Martin sbbizlaw.com
Attorney's Newman and Martin have offered you good advice. You should also have your business attorney also determine if there are any federal or state securities laws that may govern your investment and/or the LLC have been complied with.
Phillip M. Smith Jr.
Los Angeles Tax & Business Attorney
Licensed to Practice in the United States Tax Court
THESE COMMENTS ARE NOT LEGAL ADVICE. They are provided for informational purposes only. Actual legal advice can only be provided after consultation by an attorney licensed in your jurisdiction. The answer to question does not create an attorney-client relationship or otherwise require further consultation. Mr. Smith is licensed to practice law throughout the state of California with offices in Los Angeles County. He is authorized to handle IRS matters throughout the United States, and is also licensed to practice before the United States Tax Court. His phone number is 323-292-4116 or his email address is [email protected]
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