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Richard, Attorney
Category: Business Law
Satisfied Customers: 54723
Experience:  32 years of experience practicing law and a businessman.
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We are helping a friend go into business. He is setting up

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We are helping a friend go into business. He is setting up the LLC. We are loaning him money to start up in exchange for the following:

Part A: he pays us back first off the gross receipts plus interest
Part B: after the loan is repaid, we will have/own 20% of the company... presumeably in stock
Part C: if my spouse decides to leave his job and go "sell" with the friend, they will be 50/50 partners in the net profits.

My Q is this: What is the best way to set this up? Pros/Cons, etc. We already have an LLC of our own. Should this be an agreement btwn the two LLCs (ours and his)? Or should we be on the new LLC, too? Or should he set up his LLC in his name and keep the agreement outlined above separate btwn his LLC and us personally (not our LLC, more like a partnership agreement?).

Welcome! My goal is to do my very best to understand your situation and to provide a full and complete answer for you.

Good evening. I would suggest you become an owner in the LLC from the beginning so that you can build in the terms and provisions of your agreement in the Operating Agreement now while everyone is happy. You don't want to get your 20% later and then not be able to agree on the Operating Agreement when he already has your money. Also, you don't want to treat this as a note so you don't run the risk of any usury issues with respect to the 20%. So, it's best to be admitted now and provide in your Operating Agreement for the LLC that distributions are to go first 100% until you receive cumulative distributions equal to your money, and then split accordingly. You also want to specify exactly what compensation he is entitled to for working for the LLC so you don't have a bunch of money going out of the top. You can be individual members of the LLC as it's already a limited liability entity.

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Customer: replied 4 years ago.

Just to clarify... operating agreement should (loosely) read or be between which option:


Option A: This is an agreement between XXXXX XXXXX and Pete Smith

Option B: This is an agreement between XXXXX XXXXX and Smith Enterprises LLC

Option C: This is an agreement between Jones Enterprises LLC and Smith Enterprises LLC



I would suggest Option A. The LLC is already a limited liability entity so you don't need any further insulation from liability.
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