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Law Educator, Esq.
Law Educator, Esq., Attorney
Category: Business Law
Satisfied Customers: 118201
Experience:  All corporate law, including non-profits and charitable fraternal organizations.
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I entered a business as a silent partner and financial backer

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I entered a business as a silent partner and financial backer just over a year ago. We are now working on our LLC operating agreement. I was wondering what I can do to protect myself when negotiating the contract?
The LLC agreement should contain clauses regarding when you will receive your money and buyout provisions in the event you want to get out of the LLC. Also, if you want to be more than a silent partner now, the agreement should detail your rights. You should also have provisions in there regarding the percetage of profits to which you are entitled.

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Customer: replied 8 years ago.
Hello Paul,

Thanks for your help on this. Please answer the following questions as if you were in my shoes going into this situation.

I know that there should be clauses about when I should recieve my money. I was wondering what is a fair way to set this up? In other words, what typically happens in this situation when I bring $ to the table and they bring the skills. What is they best way to set up the return?

Is there anything that I can put in the agreement to help protect me? I am very concerned that they could screw me since I do not have a voting right. As of now they make all the decisions and therfore can pretty much decide their salaries, what the company needs to keep in the bank etc...

What kind of buyout provisions would you want to be included in the LLC?

As of now they have agreed to share 20% of the profits with me. Is there anything I could put into the LLC that makes sure they are trying to maximize profits, rather then having them spend all the company money so there is no profit at the end of each year.

Is there anything else that I should be aware of as we negotiate this agreement?

What kind of rights should I push for?

Thank you for your help and obviously I have no problem paying you if you can help me with some more details. I am also will to pay you more depending on how helpful your responce is.
The way I look at this is that it still is a 50-50 venture since without your funding they would have no venture and that is where you need to start on the sharing of profits. If they want to go less than 50-50, then you can ask for a payment on your loan to the LLC in addition to your reduced share of the profits and an agreement that once the loan is paid off you would continue to take that reduced profit (I wouldn't go lower than 33 1/3% of the profits as long as the investment is outstanding and then agree to an acceptable reduced percentage once the loan has been paid off).

I would put a clause in the argeement that you should have voting rights at least until your money investment has been paid off.

The buyout provision should be something that at least gives you a full return on your investment and some reasonable interest rate and you should make them personally liable for that in case they try to place the LLC into bankruptcy.

Again, as far as rights, as long as your money is invested you should have some say in the company regarding expenditures on salaries and purchases and even entering contracts, everything but the actual work of the business to protect your investment.

The botXXXXX XXXXXne here is your protection and you need to keep impressing that upon them. Another alternative is you can insist they put up a bond for your investment which would guarantee it and that they take life insurance policies with you as beneficiary to protect your investment and in exchange, then you could settle on the reduced percentage acceptable to you.
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Customer: replied 8 years ago.
Thank you for your response. I guess I was not clear on a few things. I have two business partners and when I came into the venture just over a year ago we decided that they would each be 40% owners and I would be a 20% silent partner. I basically agreed that I was buying into the business as a silent partner and did not classify it as a loan to be re-payed.

I wish that before I contributed any capital to the company that we had negotiated some of these details.

Would you give me the same advice given the situation?

Is there anything else that I should be asking for in order to better protect myself?

What happens if they do not agree with me?

I feel as if I screwed myself over in the beginning and should have been firm about being a 1/3 owner of the business.

If they do not agree with you and if you have already put up the money, you have put yourself into a bind here and what you can negotiate for may be a bit limited. I would still ask for at least the life insurance policies to cover your investment in the case something happens to one of them and the business cannot continue. I would also ask for some control until you have recouped the amount of your investment from the profits just to protect your investments, such as a vote on salaries or expenditures to prevent them from bleeding all of the profits from the company and leaving you with nothing, since you have to have a return on your investment and it would be silly of them to think they could take high salaries which would leave the profits low and thus cut you from a reasonable return on your investment. If they do not agree with you, then you would have to push for a return of your investment money, which may be difficult if they have already spent it.