Forums: Discussions for entrepreneurs and small business.

I am starting a partnership with a total of four people.  We will be creating a LLC with the intention of investing in Residential Real Estate.  Two of the partners will be contributing the money and two of the partners will be doing all the work.  I will be one of the people putting in the work and I want to know how to value my "sweat equity".  I would never get into this arrangement unless each partner owned exactly 25% of the LLC, or at least had the potential to own 25% within the next couple of years.    How do I go from a situation where I`ve put no money into the LLC to owning 25% of it?

I will not need of the income the LLC is brining in, so my share of the earnings will be reinvested.  Will that reinvestment be growing the total value of the LLC or will it just be paying off the partners who put in money.  

As far as dollar figures go.  We will be starting with around $100,000.  So is it as simple as waiting until my share has earned $25k, and then I`m completely vested, or does it get more complicated than that?

Any help would be greatly appreciated!

If it is agreed that each partner will own 25% of the business, two partners will be investing their time and work while the other two will invest 100k in cash, that is 50k each. Each of the members that are putting in their work instead of the cash would have to work a predetermined amount of time so that the investment in time and work equals the cash investment. For the sake of argument let’s say that each working member gets an annual salary of 50k, they would have to work that amount of time without pay.

If the business starts producing profits before the time invested in work equates it’s cash equivalent, and profits are distributed according to the company’s ownership percentage, in this case 25% for each, even if the working members have not worked a full year yet. Those are two separate issues, while the cash was invested in one clean swoop, the working partners are still investing their time/work.

The partners that invest the cash do not get to take the profits out of the corporation as compensation for their ‘investment’ in the same manner that the working partners do not get their time reimbursed, ever. They do get to take the profits if they are issued by the company, but so do the other two partners.

These are things that can be handled in the formation and partnership documents.

If you contact me directly, we can help you with your specific needs.

Robert Johnson

robert@bizgrowthmasters.com

 

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Business Growth Masters, LLC -
Capital Catalysts for Entrepreneurs
Home of the Scalable Business Plan and QuikStart Capital Programs
http://www.bizgrowthmasters.com
info@bizgrowthmasters.com

Thanks for your reply.  I have a better understanding of how it works, and will help when I start negotiations.

He`s probably not quite there just yet.


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Two options if you go it alone:

1. Go to your Secretary of State pronto and obtain the necessary documentation and instructions.  Most SOS state sites walk you through the entire process without the need of assistance, independent agent, nor a lawyer.

2. Make sure you are clear on an LLC.  As a partner firm you`ll need to check into an LLP (limited liability partnership).

You need to draft the company by-laws clearly stating each partner`s role and ownership.  There are many examples on the Internet to education yourself before going and dumping too much moola into it.  Take your time and be tight about it.


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Matt:

A couple of quick points.

1. LLC`s don`t have by-laws. They use an "operating agreement".

2. If the LLC makes a profit duing any year, each member (owner) may be have a tax liability because an LLC is a pass through structure.This liability will exist whether the company makes any distributions or not.

Finally, given the complexity of your structure - you would be wise to seek expert advice.

Robert Johnson

-------------------------

Business Growth Masters, LLC -
Capital Catalysts for Entrepreneurs
Home of the Scalable Business Plan and QuikStart Capital Programs
http://www.bizgrowthmasters.com
info@bizgrowthmasters.com