AboutDavid K. Staub Expertise I am a business and tax attorney and have spent more than 30 years assisting people in starting a wide variety of businesses. I can answer questions about the basic differences between the various entities available to new businesses, including limited liability companies, corporations, S corporations and partnerships. I can provide guidance in other areas facing start ups, such as hiring employees, signing contracts and obtaining necessary licenses. 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.
Question I've just established an LLC and am working on the Operating Agreement. There are three members: myself (who will own the majority of the business, work in it, vote in it, and manage it), my spouse (who will own a small percentage, work in it, but not vote or manage), and a third party (who was added simply so we wouldn't have the liability risks of a single-member (disregarded entity) LLC. This third party will own a tiny slice of the business, but will not work in it, vote, or manage). How should the distribution of membership shares be structured so that these roles are clear?
Answer The operating agreement should spell out exactly what the rights of each member are. Rights include voting and management rights and rights to distributions, but the two do not need to be in any way related. For example, someone who is entitled to only 20% of the distributions could be entitled to exercise all management rights.
In other words "the distribution of membership shares" is really not a separate issue. LLC are not like corporations that have a fixed number of shares outstanding at any time. You can specify the rights much as you describe in your question (though likely in much more detail). You can say that Member C is entitled to x% of all distributions, and will be allocated x% of all taxable income or loss but that Member C is not entitled to participate in any way in the management of the LLC.
How you accomplish the end result differs between states. Some states specify one result if the operating agreement is silent and other states specify an entirely different result if the operating agreement does not address the issue. Because of those variations, I strongly urge you to consult with a lawyer who is familiar with the laws of your state before you sign your operating agreement.
