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Chris T., JD
Chris T., JD, Attorney
Category: Legal
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Experience:  Experienced in both state and federal court.
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This is a tax related question. Whats the difference between

Resolved Question:

This is a tax related question.

What's the difference between capital contribution and voting rights?
We have an LLC with equal voting rights (50$ each).
If one member contributes more than the other, does it mean he looses the 50% voting giht? Or does it mean that the future profit/loss would be in the proportion of their capital contribution?
Submitted: 7 months ago.
Category: Legal
Expert:  Chris T., JD replied 7 months ago.

Chris T., JD :

Hello. I'll be assisting you with your question.

Chris T., JD :

Voting rights and capital contribution are not, necessarily, tied together.

Customer:

Hello

Chris T., JD :

For example, a person could own a certain percentage of the company and take a certain percentage of the profit, but have no voting shares.

Chris T., JD :

It all depends on how the LLC agreement is written.

Customer:

Our operating agreement says we have equal - 50% voting rights.

Chris T., JD :

If the agreement says that both partners have a 50% voting right, and does not specifically say that further capital contributions increase that voting share, then they don't.

Customer:

So, if my partner contributes additional amount and I don't contribute this amount, it won't affect my voting rights. We are still deadlocked? Is this correct?

Chris T., JD :

In other words, more voting rights are not inferred from contributing more money.

Chris T., JD :

Without reading your agreement, it is impossible for me to give a definitive answer, but unless otherwise stated, you are correct.

Customer:

OK. If the LLC declares profits/losses, that would be proportionate to our capital contribution. Is this correct?

Customer:

Can I send my operating agreement? This is a short doc and can you review just the section related to voting rights and capital contribution?

Chris T., JD :

Sure. Just attach it to this chat using the paperclip icon above.

Customer:

Unfortunately I can't attach as the pdf is slightly more than allowed. Is there any other option to send larger doc?

Chris T., JD :

No, that's the only option. Can you break it up into two documents?

Customer:

Let me see.

Chris T., JD :

Ok.

Customer:

Full Size Image

Chris T., JD :

OK. Got it. What is your question about that section?

Customer:

Full Size Image

Customer:

Full Size Image

Chris T., JD :

OK. So, back to your question, your partner made additional capital contributions (or plans to make them), and you want to know if that will increase his "capital interest" as defined by your agreement?

Customer:

So far we have contributed equally. But we have one last item that needs about $60K more. Ideally this should have been $30K each. But I would like to withhold contribution since I have a feeling that he is taking control of the business. To make things short, he is not going ahead with opening the business and deliberately reduce the market value of the business so that he can grab it for cheap.

Chris T., JD :

If one partner is acting contrary to the business's interests or the other partner(s), a lawsuit can be brought against them for breach of fiduciary duty.

Chris T., JD :

But, as it relates to the capital contribution, his contributing to the company does not itself grant him a larger percentage of ownership, unless otherwise stated. That said, if he plans to contribute more of the 60k than you, you should get an agreement in writing that it doesn't increase his ownership percentage just to avoid potential litigation.

Customer:

What he doesn't give it in writing? But the agreement says that all partners have to agree for additional contribution, though

Chris T., JD :

That's correct. If I were you, I wouldn't agree unless there is an understanding that he doesn't increase his share. I think you would ultimately win in court, but the cost, both financially and to the business, make litigation a losing prospect for you, regardless of the outcome. Of course, you know much, much more about your situation than I do, but that would be my humble suggestion.

Chris T., JD :

Do you have any questions?

Customer:

So, can I ask him not to contribute more if he doesn't agree to give it in writing?

Chris T., JD :

You can since your operating agreement specifies that further capital contributions require agreement from all the members.

Customer:

OK. That would put a lien on the property since this amount is for a job related to getting occupancy permit. Would this cause any issue to me?

Chris T., JD :

Keep in mind that by default, voting rights are set by each member's interest in the profits. So, you need to make it clear that: a) his contribution is not increasing his share of the profits; or b) if you give him a greater share of the profits, it is not increasing his voting rights.

Chris T., JD :

The act of contributing does not by itself create a lien.

Customer:

I am ok to let him take more profit - prorated to his contributions. Does the operating agreement state that by increasing contribution it increases the voting rights?

The lien is on the building if the contractor doesn't get paid his money

Chris T., JD :

It doesn't state that in the part I read, but that is the default by law. It can be changed by agreement, though.

Chris T., JD :

Yes, the he will have a contractor lien for performing whatever construction work he does. If the building is owned by the LLC, that would impact you, potentially.

Customer:

I don't mind my share of the construction work but he is deliberately preventing the business from opening so that he can buy the business at a reduced rate. If this happens do I have any option?

Chris T., JD :

Yes, if he's intentionally harming the LLC (and thereby, you), you can sue him for breach of fiduciary duty.

Customer:

OK. Thanks for all your responses. Great service!

Chris T., JD, Attorney
Category: Legal
Satisfied Customers: 3389
Experience: Experienced in both state and federal court.
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