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socrateaser
socrateaser, Attorney
Category: Business Law
Satisfied Customers: 33850
Experience:  Retired (mostly)
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Myself and two longtime friends are in the process of forming

Customer Question

Myself and two longtime friends are in the process of forming an LLC. Now we would like to work with two or three other people. Would our best move be to work with the other persons as 5% Limited Partners and our LLC as the General Partner? If this is not a good idea, then how can we best work with the others and share profits with them?
Submitted: 5 years ago.
Category: Business Law
Expert:  socrateaser replied 5 years ago.

Question for you: What do you mean by "work with?"

 

That is, do you intend that these other persons will be passive investors, active partners, or employees?

 

Customer: replied 5 years ago.
The 2 or 3 peope we would like to involve as 5% each limited partners will not invest any money. Their participation will be using their expertise to help us build members and content for our Global Fitness Association LLC membership website. So I think the answer to your question would be they will not be passive investors or employees. I would say they are to be active partners with limited liability and not be members of our LLC. Thank you, Jim.
Expert:  socrateaser replied 5 years ago.

You may want to consider giving the 5% partners economic rights to profits but no management rights. This is typical in an LLC. You could add the right to repurchase their respective interests for the equitable value of their investment at the time of repurchase. That way, if things don't work out, you buy them out and say goodbye.

 

Their liability would be limited to their investment (unless they commit some act that is outside the scope of the business, in which case, it would be their problem and not the LLC's -- or, at least that's the theory). In practice, however, having active partners who have no management responsibility argues STRONGLY for liability insurance, to protect the management owners from being held liable for the stupidity (pardon me, for the errors and ommissions) of their non-mangement partners, who assert to third parties that they have management powers.

 

Customer: replied 5 years ago.
Thank you, XXXXX XXXXX 5% partners economic rights to profits but no management rights. This is typical in an LLC. You could add the right to repurchase their respective interests for the equitable value of their investment at the time of repurchase. That way, if things don't work out, you buy them out and say goodbye. Their liability would be limited to their investment (which in our 5% partners would be sweat equity). This sounds like what we want to accomplish, but how do we go about it? What type of agreement do we ask them to sign? Jim
Expert:  socrateaser replied 5 years ago.

You have to draft an operating agreement that sets forth the various provisions for the operation of the LLC; including adding, transferring and terminating memberships, and the various classes of ownership.

 

Then the original partners vote to add a member and then issue an agreement whereby the new member obtains X% of ownership in consideration for whatever the new member is providing as consideration (usually money, but not always). Everybody signs and you're on board.

 

You also have to register the LLC with the CA Secretary of State.

 

Lots of online services will provide fill-in-the-blanks LLC agreements and registrations ($). The only way you will get a custom agreement is to have an attorney draft it ($$$$).

 

Customer: replied 5 years ago.
You state,

 

Then the original partners vote to add a member and then issue an agreement whereby the new member obtains X% of ownership in consideration for whatever the new member is providing as consideration (usually money, but not always). Everybody signs and you're on board.

 

I am still confused as to which type of an agreement (what is it's name?) are we going to issue? Can we limit the new member's rights and voting priviliges when it comes to making decisions for the LLC?

Expert:  socrateaser replied 5 years ago.

The agreement is called an "operating agreement." It's the document under which an LLC operates (thus the name of the agreement).

 

An example of an operating agreement can be found here: http://business.uschamber.com/tools/opagree_m.asp.

 

However, this is a Delaware LLC, so it may not be entirely applicable to California.

 

 

 

 

 

 

Customer: replied 5 years ago.
Do you mean we revise the Operating Agreement to include the new members and then all parties sign it? Therefore, the new Operating Agreement will supercede the prior Operating Agreement? Thank you, Jim
Expert:  socrateaser replied 5 years ago.

No, I mean that you could reference the operating agreement in an agreement between existing members and new members.

 

But, you could amend an existing operating agreement, instead.

 

There's no "one" right way to do it.

 

 

 

Expert:  socrateaser replied 5 years ago.
Is my answer acceptable?
Customer: replied 5 years ago.
Sorry, I held up on a phone call. I still don't know what the name of the agreement is that our LLC would enter into with the people we would like to bring in on a limited 5% partnership basis? I really don't like anybody except our original the 3 people being members of the LLC.
Expert:  socrateaser replied 5 years ago.

It's commonly called a "buy-sell" agreement.

 

Is my answer acceptable?

 

Customer: replied 5 years ago.
Thank you, XXXXX XXXXX more than patient. However, I can't see how a Buy and Sell Agreement can help us to bring in other people to work with our LLC and not be a part of it. SIMPLY is a Limited Partnership Agreement with our LLC being the general partner the right way to proceed?
Expert:  socrateaser replied 5 years ago.

Yes, that will work.

 

Customer: replied 5 years ago.
Last question - can you please direct me to a site that has a boiler plate for a Limited Partnership Agreement?
Expert:  socrateaser replied 5 years ago.

I have no suggestion in this area. Sorry.

 

socrateaser, Attorney
Category: Business Law
Satisfied Customers: 33850
Experience: Retired (mostly)
socrateaser and 8 other Business Law Specialists are ready to help you
Customer: replied 5 years ago.
Thank youCustomer I will preceed with a Limited Partnership Agreement. Jim
Expert:  socrateaser replied 5 years ago.

You're welcome and good luck.

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