12 Critical Questions To Ask When Forming an LLC with a Partner
Starting a new business starts as exciting and can quickly turn scary when you think about all you don’t know about launching a new venture.
Fortunately, there are resources out there today that make the process of starting a company much easier than it was even just five years ago. Today, there a multitude of online services that can help you create your very own company for nearly nothing. However, many new entrepreneurs don’t realize that starting a company is simply the first step in the marathon of launching and, perhaps, one day, exiting your business.
The next critical step that many founders and over-eager entrepreneurs miss is the step of sitting down and figuring out how you are going to work with your co-founder or founding team.
While the agreements you draft will vary based on the type of entity you choose to create (that is the subject of a different post), the fundamentals of the initial “partnership” (the term is used generically here) agreement are relatively consistent.
Limited Liability Companies
One of the most common entities created today is the limited liability company or LLC. It is often used because it is considered simple to set up, provides limited liability protection, and is not subject to double-taxation like corporations. However, jumping into an LLC is not always the best option. The decision to start an LLC should be carefully weighed against your overall objectives with the company, such as whether you want to issue equity to employees or investors, whether you are going for institutional financing, and if you’re going to take your company public.
If you are confident that the LLC is the right entity choice for you, it is crucial you and your partners (or soon to be members), spend the necessary time and consideration in thinking about your Operating Agreement and a Buy-Sell Agreement. By considering the following 12 questions, you will be way ahead of the majority of entrepreneurs who often put the cart before the horse and end up paying 10x to clean up what a properly drafted LLC governance documents would have cost them from the beginning.
The 12 Essential Question
- Will the LLC be member-managed or manager-managed?
- How will you split up the membership interests?
- How is the company going to be financed?
- Will you split capital interests and profit interests the same way?
- In what state will the LLC be organized? (Be wary of Nevada and Wyoming just because you heard they are better for taxes.)
- How will new members be admitted?
- Can the members be part of other LLCs that may compete in some way?
- Can a member be expelled?
- Who will manage the LLC?
- Can LLC interests be sold to third parties?
- What if there is a deadlock in voting?
- Is there a clear plan of how a member’s interest will be repurchased if they leave the LLC?
The above questions are not easy to answer. However, we have considerable experience with helping our clients navigate some of these challenging questions. And with the right insight and reliable communication between the members, you can come to practical answers to these hard questions, giving you the peace of mind and confidence that you are setting up your venture for success.