Options Paying a co-partner in an LLC
My partner and I are starting an LLC in california. We are in different financial situations, I have enough of a nest-egg to not take a salary, he does not and needs an income asap.
We have also secured some seed money on the contingency that both founders contribute cash to the pot. I am going to put in ~$50k, my partner is going to borrow so he can contribute $10k-$25k, and then we may raise and additional ~$200k.
My understanding of an LLC means that this means our capital accounts are 50k and 25k initally. If my partner needs $5k/month, my understanding is we have two options:
- The $5k is deducted from his capital account. Neither my partner or the company owes taxes.
- My partner can have a Guarenteed Payment of $5k/mo. Both the company and my partner would have to pay taxes. And it may be unfair if he is taking 5k from the company and I am not.
What is the best/fair way to pay my partner?
My take is that it should be subtracted from his capital account until it reaches zero. At which point - I don't know what to do. But this is ther first company either of us have setup
1 Answer
So he is putting up 5 months working capital himself, does it just hold onto what he has or does he put it in?
Well, not sure exactly about the LLC situation but generally if people valuing the company look at it its either worth $50K or $75K and then some "juggling for sweat equity". Part of your bargining power is the % of funds the next investor is putting in.
Your trading off a short term tax implication against a longer term value of the company and contribution to the company ...
Either way will work but in Austraila at least the captial gains when you sell out will be much higher for him as he has gone from $1 to $1million (for arguements sake).
I would make both of you "buy into shares" over 2 years, it can be done as sweat equity or something like "we both should earn $100K, your taking $60K per year early so that impacts your shareholding if the business is paying your wage". For each month you draw the wage this is the amount of shares you buy ... then you can balance the amount contributed. (make a way like extra effort that your partner can make up the balance).
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Thanks Rob. I definately agree about the balance - but my understanding is that LLCs have their own special tax consequences. One concern I have is that if he puts in $5k, and then takes out $5k that both the company and he have to pay 28% taxes on money that just circulated. The other concern I have is that if we get the funding we seek, he wants to structure it as convertable debt - and should we fail + liquidate, I want to make sure he does not get more than he deserves if he took a salary and I did not (of course we both could have nothing) – Dbh21 13 years ago
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Sorry I can't comment on the LLC, I live in Australia. I think working out a sunset clause around "direct money contribution gets paid back first" or having a "4/1 ratio" Money to Sweat Equity payback until the money is paid out could work for you. – Robin Vessey 13 years ago
