llc, partnership, teamSo, me and two other guys from work have been doing some moonlighting on the side together. We are half way through our first job. The first job is for 15K. Initially we were going to start an LLC together as three equal partners, but at our most recent meeting one of the guys wanted to just have it in his name because – as he told us - if we moved away he could still have the business. Back story: it has always been a dream of his to own his own company, etc (as he has told us). It is so early in our moonlighting phase, that me and the other guy weren’t sure what to say.
I am not familiar with the pros and cons of this kind of situation, so any help would be appreciated.
Also, the 15k he wants to split like this:
$3750 for him. $3750 for me. $3750 for the other partner and then $3750 goes into the LLC bank to cover, I guess taxes and what not? So, he would get $3750 as payment for work done and then another for his LLC biz. So, is that like he is getting paid double us ($7500)? Or am I understanding this wrong or something? If he is getting paid double, is it deserved maybe (e.g., like he is taking more risk as an LLC or something, or there are so many taxes on an LLC, that it would drain the account of that money anyway)? I guess we would function as employees / contractors too. Would we still have to pay taxes as employees or would that already be down through the LLC? Again, total newb to the business / legal world, so any help appreciated.
Also, this is just a hypothetical question: if we were to each just split it, say, evenly three ways we would each get $5000. Would me and the other guy – who would not be a partner in the LLC anyway – make more money, less money or no difference in money than if we go through his LLC?
The best choice is to split the proceeds evenly and walk away from any further dealings with the would-be business owner, as recommended in this answer.
This is a second-best option if, for any reason, you are tempted not to follow that advice.
For clarity, I am going to call you "A", the colleague who is in the same situation "B", and the one who is arguing for sole ownership "C".
You and B could tell C that you understand that having one owner makes the setup simpler. If you were going to share you should be defining now how to handle one or more of the owners moving away or otherwise dropping active participation. However, all three of you would like to be the owner.
As a fair solution to that problem, propose drawing lots to pick the owner.
If the terms are fair, C should not particularly care whether he is the owner or one of the non-owners. In practice, I expect C to strongly object, or want to change the terms to be much less generous to the business owner.
Finish the job, split the $15000 equally three ways, and never talk to that jerk again.
You are dealing with a fast talking con man who will be as rich as Croesus some day, and he will do it mostly by paying other people less than they are worth. The mere fact that he would even propose such an unconscionable division of the proceeds of the labor of the three of you is a klaxon alarm warning you off signing any arrangement with him.
You would actually be better off paying someone $1250 to follow you around and slap your hand away whenever you tried to sign an LLC agreement like that. You would still end up with only $3750 instead of $5000 but at least you would not have to be ashamed of your gullibility.
Under and LLC setup, the owner will be taxed on whatever is in the company account at the end of the year, in addition to whatever split he takes. You will only be taxed on the payment you receive.
However, the first partner owns the company, and you own nothing, becoming, at that point, a contractor working on a pure contingency basis. (Very bad deal if you are functionally a founder, as it seems you are. Very, very bad deal.)
Some people go crazy as soon as there is a hint of money, and in my experience, these are not the people you want to partner with.
Anything other than a 3x 1/3 split of the LLC is what is euphemistically known as a “f*ck you” deal for you and the 3rd founder.
A 3 way split between 3 founders is a great structure, because it doesn’t allow for the possibility of deadlocks, which generally result in the dissolution of the company.
However, there is still the problem of the first founder, who it sounds like, will be unhappy with an equitable division.
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