Forums: Discussions for entrepreneurs and small business.

I've been working successfully as an independent software consultant for two years and have been seeing an increase in demand for my services.  I have two associates who are interested in taking on intermittent consulting jobs and we are discussing the logistics for partnering.  We've done some research and an LLC seems ideal for our situation.

My questions are in regards to finances.  Our intention is to operate as independent contractors to the LLC (in which we will be equal shareholders).  The startup costs are minimal, we hope to keep overhead low, each of us will be responsible for our own individual operating expenses.  Our billing is hourly and payout will be based on hourly contribution also.

1. Non-billable overhead.  Plan is to have an administrative fund with an established minimum balance.  When balance falls below minimum, each of us will contribute some fixed percentage of our billable earnings to the adminfund until the minimum balance is restored.  Or should we each just cut an equal-sized check back to the common fund?   If, let's say, I spend 10 hours managing finances for the LLC I would expect to be paid for my time from the admin fund.  Sound fair?

2. Commissions/Finders fee.  Given that I have a well-established network, I will probably be finding the majority of new jobs and then employing my partners for the work.  We're discussing commission models.  Specifically, afixed percentage (10%) finder's fee for new job, lower percentage (5%) renewal fee for returning customers.  Are these numbers too low, too high?

3. Risk/Contribution.  As I mentioned, I am established as a consultant and that's my primary source of income.  My associates both have full time employment and will be "trying out" contract work on the side initially (don't worry we checked for non-compete conflicts) with interest in committing more fully if its a good fit.  How should this impact our Articles of Organization or compensation?  Should this be reflected in our shareholder percentage?  Does shareholder percentage have value in the model I've proposed?

4. What financial stuff haven't we thought of yet?

Thanks in advance for your input, apologies if this is too many questions for one post.
Tom

Congrats on getting the business big enough to expand.

From what you describe in 3 -the other 2 individuals are testing the water, I suggest that you consider a phased approach, using the two associates as independent contractors in your business and cover the finders fee arrangement and non-compete in the services agreements.  If you add the LLC now you will be adding a fair bit of additional admin work and since your colleagues are interested in testing the water, this gives you all an easy and cost effective way to back out if it doesn't work out.

I am a bit jaded on partnerships, I have seen too many clients spend time and money trying to unwind them. If you go forward, be sure to add some specific buy out agreements so that if it doesn't work for all 3 of you going forward, it simplifies the process.

Good Luck.

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