About David K. Staub Expertise I am a business and tax attorney and have spent more than 30 years assisting people with contracts in a wide variety of business situations. I can answer questions about basic contract issues. My experience includes almost all common contracts including employment agreements, contracts for the purchase and sale of a business, shareholder agreements, partnership agreements, LLC operating agreements, leases, software development agreements, distribution agreements, franchise agreements, joint venture agreements and software license agreements, to name a few. I can also direct people to sources for answers to specific legal questions which cannot be answered in a forum of this nature.
Experience
Experience in the area I have been an Illinois business attorney for almost 30 years. I have an extensive practice in the mergers and acquisitions area and have been involved in the tax and legal issues on hundreds of business transactions.
Organizations Illinois State Bar Association;
Chicago Bar Association (former Chairman of the Corporation & Business Law Committee and former Chairman of the Mergers and Acquisitions Subcommittee; former Executive Committee member, Federal Tax Committee and Chairman of subcommittee on general tax issues); Glenkirk Foundation (Trustee; Vice-Chairman/Strategic Planning); Association for Corporate Growth, Chicago Chapter; Midwest Entrepreneur Forum; Midwest Association of Alpha Delta Phi - President
Publications Commerce Magazine; YLS Journal; ISBA Section of Taxation Newsletter
Education/Credentials Harvard Law School, J.D., 1977; University of Illinois, B.S. in Accounting, with highest honors, 1974
Disclaimer Responses are intended to be informational only. No response is intended to constitute legal advice or create an attorney-client relationship. Online advice is not a substitute for consultation with an attorney.
I am in process of forming an LLC. I will contribute the IP (our asset), have spend approximately 700 hours developing it and both my partner and I will contribute equal amounts of money. I will be managing the business - he will act passively in more of an advisory role (advice, strategy, etc.).
Our initial ownership split will be 75/25
What is the best way to structure the operating agreement with regards to profit distribution, workload/work contribution, etc?
Thank you!
Answer Your question is an excellent one. One of the great things about an LLC is that the structure can be practically anything you need it to be.
You and the other member need to ask yourselves what you want. For example, on the distribution of profits, does it go 75/25 like the ownership? Is there some separate element of compensation for the time you spend? Is there some separate element for a return on the equal cash you have both invested? Is there some separate element in the computation of profit distributions to reflect the IP you have contributed? No one but the two of you can answer these questions. There is no single objectively correct answer.
Also, what cash is distributed? Is it all the profits? Is anything retained for contingencies or future growth? Is there at least a minimum distribution to cover the taxes the members will have to pay on the pass-through income? Who determines what amount gets paid out?
What if future funds are needed in the business? Who makes that determination? Is there an obligation to contribute capital in the future if there is a capital call? What happens if one member fails to meet the capital call?
How are decisions made, in general? Can the 75% member decide everything? Are there certain decisions that require approval of the other member? Admitting another member? Transferring a member's interest in the LLC? Amending the operating agreement? Be particularly careful because the state statute may have rules that basically fill in anything that your operating agreement fails to cover. Often these so-called "default rules" are not what you would want.
This is just the tip of the iceberg. You should really consult an attorney who is very familiar with the rules for LLCs in your state. A well thought out operating agreement adopted at the outset of your new business will save you a lot of uncertainty and angst later on.
