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Richard, Attorney
Category: Business Law
Satisfied Customers: 55294
Experience:  32 years of experience practicing law and a businessman.
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My friend and I want to become co-owners of a restaurant by

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My friend and I want to become co-owners of a restaurant by contributing capital to the restaurant in return for a percentage of ownership and a split of profits. We will both also be working at the restaurant. The restaurant's owner is listed as an LLC and the LLC is made up of two individual members. Those members want my friend and I to become co-owners in the restaurant by joining their LLC as direct partners via a non-stock LLC subscription agreement. My friend and I originally wanted to become co-owners of this restaurant by forming our own LLC and drafting a partnership agreement with the current owners' LLC but the current owners say that by us just joining their LLC as direct partners via a subscription agreement it's an easier process becuase no escrow would be necessary, posting a notice wouldn't be necessary, and transferring the license wouldn't be necessary. I would like to know if joining their LLC as direct partners via a subscription agreement would be, like they say, the easiest way to become co-owners in the restaurant and I would really like to know the negatives associated with joining their LLC via a subscription agreement, like whether my friend and I would be liable for any lawsuits, investigations, etc brought against their LLC prior to us joining their LLC via the subscription agreement. Also, if we chose not to join their LLC via the subscription agreement, can't my friend and I become owners in the restaurant by simply amending the restaurant's Operating Agreement and Articles of Organization to reflect my and my partner's capital contribution, the new respective ownership percentages, profit distribution, etc (and still avoid escrow, posting notices, etc this way too)?
Submitted: 5 years ago.
Category: Business Law
Expert:  Richard replied 5 years ago.

Good evening. The typical way to structure this would be to admit new partners into the existing LLC. For the new partners to form a new LLC and then own the entity as 50/50 partners would indeed require a transfer of the business itself, including all licenses. Rather, it's typical that the new members sign a subscription agreement evidencing their purchase of an interest in the existing LLC, and then to amend and restate the LLC operating agreement to set forth all the terms and conditions of the agreement of all the members. In this manner, only a change in ownership of the entity itself takes place and the entity continues to own the restaurant itself with the licenses and permits in the name of the LLC. The existing members however will want to indemnify and hold harmless the new members for any claims or suits attributable to a time period prior to the admission of the new members.

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Customer: replied 5 years ago.
Not sure if you received my follow up question so here it goes again: I have a question regarding the existing members indemnifying and holding harmless the new members of the LLC: What exactly does this mean and how is it done? I know these terms would be included in the subscription agreement, but in a real life scenario does this mean that if there is a lawsuit brought against the LLC for acts that happened prior to the new members joining, the new members would never have to use any of their money to pay for the legal costs associated with this law suit? And, if the LLC loses that lawsuit, does that mean that any monetary award to the party who brought the suit would come from the exisiting partners (and not the new partners)? Thank you!
Expert:  Richard replied 5 years ago.
I did not receive this previously so I appreciate you reposting it. Yes, it would mean exactly that....that if there was a lawsuit for anything before the new members entered, that the prior members would be responsible, not from restaurant assets, but from their personal assets to defend the claim and pay the damages if awarded. You're welcome. It's been my pleasure to be able to help. Take care.
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