“I run a fairly successful marketing consulting business. My husband and I are thinking about entering into an agreement with a client of mine who wanted to hire me for a new project then realized he could not afford my fees once the market collapsed. I have done a lot of research and found this project to be quite profitable. So we proposed to him to start business together. He said we could ‘tag on’ to his business as an additional limited liability company (LLC), with the two couples being partners in this business. My husband has done many startups through the years and is very savvy about the process. One of our new partners (the husband) has a successful business and is used to being in control.
So my first concern is if we give 51 percent of the business to them, can they sell, acquire or close our business without our approval? Second, I will be the one marketing and doing sales (building the business). They will provide printing service at a cost, plus figure to make the business more profitable. If I want to hire more salespeople, do I have to get his (their) approval? Do we just designate what areas of the business we have the final say on? Or does his 51 percent give him total control? If so, I feel like he is my boss, not my partner.”
I agree that this venture should be a separate LLC from your marketing consulting business and your client’s printing business.
As for who the business owners would be, I would keep it as small as possible — just you and your client. Unless your spouses are willing to roll up their sleeves and get involved in the day-to-day operation of the business, they probably shouldn’t be members of the LLC at all. Your e-mail message suggests that all they would bring to the table is general business expertise and knowledge, and there are plenty of ways you can tap into that knowledge without giving them an ownership interest in the LLC. You could make them “consultants” to the business, for example, and pay them by the hour or day on a 1099 basis. Or, better yet, keep them out of the business entirely, as it sounds like they’ve got fairly strong personalities that are likely to create unnecessary friction between you and your “working” partner.
As for the ownership percentages, if this business is just going to be you and your client, I see nothing wrong with a 50/50 split. That way, neither of you can make any major decision without the other’s approval. If the relationship is a solid one, each of you will defer on decisions that fall within the other partner’s area of expertise. For example, while your partner is certainly free to voice her opinion on marketing matters, she should defer to your judgment if you stand your ground. Similarly, you should defer to your partner on printing and related matters.
Just make sure your attorney puts a provision in your LLC Operating Agreement (similar to a partnership agreement) permitting the breakup and liquidation of the business in case you and your partner are disagreeing so frequently that the business can’t move forward (called a “deadlock” situation).
If you feel it’s absolutely necessary to involve your spouses in the business, you will need your lawyer to create a “manager-managed” LLC so that day-to-day operating decisions can be made quickly and efficiently.
Here’s how this might work:
— the agreement would create a “board of managers” consisting of you and your “working” partner;
— the “board of managers” would make all business and management decisions by unanimous vote except for a list of major decisions (such as hiring and firing executive officers, adding new members to the LLC and selling business assets) that would require a vote of the LLC members (the two of you and your spouses);
— if the managers disagree on any course of action, the matter would be referred to the LLC members for resolution; and
— each member would have a 25-percent ownership stake in the LLC; and
— whenever the LLC members have to vote on anything, the approval of a “supermajority” (more than 51 percent) must be obtained before the action can be taken.
So, for example, if the LLC Operating Agreement calls for a 75 percent “supermajority vote” on major decisions affecting the LLC, at least three of the four partners (including one spouse from each couple) will have to agree before anything can happen.
One more thing: Make sure your attorney puts in a mediation clause, so that if the two couples stop talking to each other, there will be a mechanism for resolving disputes or breaking up the business without having to go to court.
Cliff Ennico (cennico@legalcareer.com) is a syndicated columnist, author and former host of the PBS television series “Money Hunt.”
COPYRIGHT 2009 CLIFFORD R. ENNICO.
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