Question about Share Ratios for a LLC

Published November 8th, 2005 edit replace rm!

I received this very good question from a reader about share ratios when converting from a partnership to a LLC. Note I have dropped his name and changed the details a bit

Let me ask you…I am about to form an LLC for a small business that I have been running for several years. I have one major partner, and I am trying to get some advice on whether I should split the shares 50-50, or if I should retain
a majority (55-45) since I was the founder and ultimately have the largest assets into the business?

Firstly, much more than a legal issue this is a human issue. It really depends all on your relationship with the partner. The simple answer from a legal standpoint would be to retain the majority, because you don’t know what could happen in the future.

All this being rationally true it could work against
you, maybe your partner would feel cheated because of this and start
bearing a grudge. As in any relationship grudges have a way of rearing
their head at some point in the future, when you least want them to do
so.

To sum it all up while rationally you should have more because you are the founder, you need to avoid grudges against you, but then again you also need to avoid grudges in you against your partner. It is all together better to avoid the times when you need that controlling stake, than having a remedy after the fact. Condoms over abortion!

One thing you might try is to offer a 50%/50% revenue split, but retain control. That seems like a good compromise. Stuff like that you can specify in the LLC agreement or in a separate contract.

Also remember I am no lawyer, then again this is a human subject and lawyers only ever should get involved when the human beings are past talking.

Anyway if anyone else has questions, please send them to me at [email protected] and let me know if you want to be anonymous. Of course I am no lawyer and I my answers might cause you to loose your house or worse your powerbook. Also feel free to comment with your own experiences and opinions below.

Comments

Cedric July 22nd, 2007

For the next person whom reads this post, the best approach is to maintain control. It’s not about having the negative mindset before entering the deal, it’s about he or she who has the vision of the business must maintain control. Once the vision is gone, the business is just another company and it’s time for retirement.

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