Getting started with an LLC
Two friends and I have run a website for a year or so and now we are about to add in our premium model so we can start bringing in some money. I have been advised that we should register an LLC prior to rolling out our premium model in order to lay things out so we don't have issues later on. I understand that with an LLC we need to lay out ownership stake for each member, however, at the present time I am the only person that has invested any money. How does one handle a situation like this? By no means would we be where we are if it was just me so I cannot rightfully give them no portion of this.
Also, after speaking to a lawyer friend, he is recommending I not register this myself because it will be complicated and I should in turn hire a lawyer to do it. Is this true?
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Since you invested real money, you get a bigger cut. Everyone else has earned "grease equity" if they did some work without contributing funding. And, yes, it's best to have a lawyer for incorporating with partners. – Dnbrv 12 years ago
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You reall asked multiple questions here, it is better to ask one at a time. As to allocating equity you may want to see http://www.brightjourney.com/q/forming-new-software-startup-allocate-ownership-fairly – Jonny Boats 12 years ago
2 Answers
I disagree 100% with your lawyer friend. Registering an LLC with the state is incredibly simple. All the information you need to register an LLC can be found on your state's website. This is one of the easiest things you'll have to do. See this question for more on that topic: Did you use an incorporation service? What service did you use? Where it does make sense to get a lawyer involved is in the crafting of your Operating Agreement. Your Operating Agreement is where you will document who the LLC members are, how much equity each member gets, who has voting rights and how are they allocated, what to do if a member leaves, etc. You can do part of this on your own, if you'd like, by following my advice here.
at the present time I am the only person that has invested any money. How does one handle a situation like this?There is no set formula for establishing equity. The short answer is that it will be whatever you all can agree to. Nothing we say here will matter if your other two friends refuse to accept your terms. The three of you have to sit down and come to an agreement based on what each of you has contributed so far, and plans to contribute in the future.
There are guidelines you can use. However, you haven't provided us with any details, so we can't help you. Take a look at Joel's very informative answer on the subject. How much has each person contributed? Is each working full-time on this? Have you invested both time and money, or just money? These are all things you'll have to consider in your negotiations.
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On top, determinig ownership should be a non-issue. There SHOULD ALREADY be an agreement about that. Normally this should all be decided, regardless of the legal form. – Net Tecture 12 years ago
I may be biased because I'm a lawyer, but your friend is right. Figuring out the correct ownership stakes and all the tax consequences is a significant undertaking. Heck, you need advice just to see if you want an LLC or a corporation. And there are all sorts of issues you'll need to think about -- how will the enterprise be managed? What happens if somebody dies? What happens if somebody decides they don't want to participate any more? What do you do with the money you take in? How do you get the appropriate assets into the company?
