Expert: John Varghese - 1/18/2010

Question
QUESTION: Is there any reason to make a planned holding company LLC (wife and me as members) a member of our manager-managed operating LLC?  How much would this detract from arms-length relationship?  Also, this seems to give wife and I another vote in the operating LLC, to add to our separate votes as members of the operating LLC, but I wonder if this is straightforward.
The operating company is planned to have a) wife as capital contributor for startup expenses and miscellaneous assets and not an employee or manager; b) me and two others as tiny capital contributors as member-managers and employees; and c) son and daughters as capital contributors.


ANSWER: Dear Keith,

The reason for making the company a member is for you to figure out. What I can advice is whether it is legally permissible or not. And the answer is definitely Yes. Being a member of another company does not per se affect the arms length relationship, so far as the membership does not make the holding company influence( or appears to others as influencing) the decisions of the operating LLC. The holding company would appear to others(including regulators) as influencing the decision of operating company if the decisions of the operating LLC are taken exactly in tune with the decisions of the holding company, in such a way as to appear that both the business do merged business.

Regarding other questions:
1. You and your wife both will not get vote, since the member company gets only 1 vote per share held by the company, and the company can nominate any one person to vote in the meetings of the company, which person can exersise the full voting rights. The voting rights of the member company cannot be split.
2. The way you are planning the operator company is fine, but I dont see the role of the holding company there. Is it going to be a promotor(capital contributor) or just another share holder who is allotted shares by the company on commencing operation? Since this point is not clear my comments on this point is reserved.

Regards

John Varghese


---------- FOLLOW-UP ----------

QUESTION: Thanks.
The holding LLC will own most of the equipment and leasehold improvements in the operating company.
Seems we must choose between wife and I having membership in the operating company via a) membership in the holding LLC which becomes a member of operating company, OR b) individual memberships in operating LLC and only contractual relationship between holding & operating LLC (via lease or rental agreements and liens).  Right?  If the latter, could it still be construed that the holding LLC calls the shots in the operating LLC -- if we leave enough capital in the operating LLC relative to its other members that we maintain a supermajority "vote in interest"?

I plan to be the Chief Executive Manager in the manager-managed operating LLC, with only a token investment.  My wife's the chief investor, but would not work in the operating LLC. Would this make a potential problem with my being the manager, or wife and I as member managers, of the holding company, i.e., not enough arms length between the companies?  

Answer
Dear Keith,
I think you have missed my point- the point is- you/wife/operating company does not have any restrictions in being a member of Operating company.It is not exactly who have shareholding that determines the relationship, but how the affairs of the company are managed is where the arms length relationship is required to be maintained. When ever any issue relating to the holding company comes before the board of Operating company or vice versa, it is better that all those board members who have any interest in the matter reveal their specific interest and then keep away from the decision making process or let the board take an informed decision.  
There wont be any issue in either case- a company can employ any person, and even if a member is an employee it does not have any bearing in the nature of the company or its relationship with other companies.

Regards

John Varghese