Seeking Partnership Advice for an LLC

[Birdsview]

am new to the site so forgive me if I seem a little naive about how this works. I do have a question regarding partnerships. I am involved in a company that is an LLC. Its a small firm. We have seven employees including the owner and myself. I am the Executive Director and co run the company although I do not have an equity share. I am a salaried employee. I have requested a partnership agreement of some kind that will allow me to profit from the contributions I have made to its growth in the past over seven years. The owner started this company fourteen years ago. Mostly I want a partnership, since we do not have a 401K or any kind of retirement program for our employees, in order to secure my future and enable me to profit from the expertise and years of service that I have given to the company's growth and expansion. When I started there was only two of us and an assistant. The owner is not very well versed in partnerships and basically fears anyone getting a share of the profits as he is not sure how it all works. For an LLC, are there not certificates that you sign giving a person equity in the company. Per my understanding, its fairly simple with an LLC. Also, is there another way to go about this that I am not aware of? Basically, I have to enlighten him on the various aspects of what would work so that I may have a more equitable percentage of the yearly profits and ultimately of the sale of the company once that occurs. Any information is very much appreciated. Thank you.

[Business Attorney]

Creating a partnership is never "fairly simple". Adding a new member to a single member LLC (http://www.limitedliabilitycompanycenter.com/what_is_a_single_member_llc.html) is taking what is essentially a sole proprietorship with limited liability and turning it into a partnership.

That raises a lot of potential issues. How are decisions made? Can the new member bind the LLC? What happens if the new member leaves his employment? Does it matter if the departure is due to retirement, death, disability or going to work for a competitor? Are there mandatory distributions to pass taxes (since the LLC is a pass-through entity)? What happens if there are losses? What obligation, if any, is there to contribute additional capital as the business either grows or suffers losses? These are just a few of the questions.

In some cases, getting an equity ownership position may be the right answer. There are other ways to share profits, however. A bonus plan based on net profits can often give the same economic result. A bonus plan often lacks the psychological boost that comes from saying you are an "owner" of the business, although I know people with those types of bonuses who do think of themselves as "owners."

[Birdsview]

Thanks David. Although my bonuses are okay they are not reflective of the business I generate. I do not think of myself as an owner due to lack of appropriate compensation and the fact that there is nothing on paper on gives me any future security with the company in terms of a future sale or partnership with someone else. If there is another way to share profits other than bonuses or equity I don't know what they may be. You are correct in saying that some type of partnership does give a psychological boost whereby you do feel there is a future compensation. I worked before this position with a company for many years and became a top Exec with them. My 401K, and my pension and other "gives" were a lucrative glue to stay within the company as its people were always considered its most important asset. This is a small company and its been a learning curve to work for a small company vs. a major global corporation. I still believe though that those of us who bring substantial knowledge, skill and talents to a company whereby these skills have contributed to its growth need to have a safety net for the future. The owner as an LLC may just be taxed on his income but his net profits are substantial and I believe that a bonus plan is not enough for my bonus plan is a smidgeon of what he is bankrolling.

If anyone has any comments on this I sure would appreciate any further advise. Thank you.

[MostHeather]

Just wanted to welcome you the forum! It's nice to meet you :)

[greenoak]

all i can say is what an old banker said to me...."in all my years ive seen only 2 partnerships work" who knows, maybe we are in a bad town....ive been in 2 partnerships ...both turned out bad....but luckily we had good exit agreement and a little luck in one....the other we had the money so we had to pay all the debts when it broke up....never again for me...
look around and listen to the real life stories out there...
its so hard to see which way it might go wrong...... so many ways,,,lol.. ....
are there any other options that could please you? does the owner even want a partner?

[Birdsview]

Thanks love the welcome!

[Birdsview]

Ann that is a very good question. No, I do not think he does. Last year he would not even talk about it...this year he is playing possum but I think he is more amicable to a discussion. A higher percentage of the profits in the form of more equitable bonus would be another option I guess. You are right, it could go wrong in so many ways and I will listen to real life stories out there for sure which by the way is a great advice. Thanks Ann.

[Business Attorney]

... I believe that a bonus plan is not enough for my bonus plan is a smidgeon of what he is bankrolling.

You say "a bonus plan is not enough" but I think what you really mean is your bonus plan is not enough.

Your focus seems to be getting compensation that represents a bigger share of the company's profits, not on participating in any other aspect of a partnership. To me, that is usually a clear sign that the answer should be to develop an appropriate compensation arrangement, not to take on the burdens and benefits of ownership. Compensation can be based on a percentage of profits and even a percentage of net sales proceeds if the business is sold. It doesn't have to mean an actual share of the ownership.

Just my two cents worth.

[LFinkle]

Partnerships are a challenging way to go. As David indicated if he has a single member LLC adding you as a partner changes the structure of the company. I'm not an attorney so I don't have the legal background to provide advise on this. There is a ton of information on the internet on partnership agreements etc. I encourage you to check into those as a baseline for the conversation. And having a partner brings up all sorts of questions. How do decisions get made if you are in agreement? Are you a 50/50 partner or something less? Do you buy shares of the company or is going to give them to you? Can you purchase more shares over time (assuming you will own less than 50%)? What will be the expectations after you are a partner and will they be different than now? Lots to think about. I wrote a book on partnerships which you can find at any major retailer. The book is titled Finding the Fork in the Road and you can download the first chapter of the book for free by going to the site of the same name.