Limited Liability Companies For Dummies by Jennifer Reuting

Author:Jennifer Reuting
Language: eng
Format: epub, pdf
ISBN: 9781119602125
Publisher: Wiley
Published: 2019-08-06T00:00:00+00:00

THE REALITY OF MEMBERSHIP SHARES

Although issuing membership is a vital part of setting up your new LLC, structuring the specifics of the membership and the members’ individual rights can be even more important. Consider this example: Childhood friends Ed, Sal, and Greg have dreamed forever of opening their own motorcycle shop. Although they all work odd jobs, they soon realize that together they could finally make this vision a reality. Ed owns an excess of equipment for building custom bikes, including the paint and specialty tools. Sal has full access to, but doesn’t own, an old vacant warehouse, and Greg has saved $50,000 in his successful entrepreneurship. Together, they possess all the pieces to build their own custom bike shop, ESG Motorbikes.

They form an LLC and divvy out their membership shares. Although Greg is fronting the capital to get the business afloat (providing the largest set of funds), Sal and Ed aren’t letting Greg overlook the value of their contributions, so after some persuasion, Greg finally relents and agrees to spread the shares out evenly at one-third. The LLC protects the members from losses that can’t exceed what they invest into the company, but it seems Greg has much more at risk and may deserve a bigger piece of the pie.

Unfortunately, after the excitement wears off and things get tough, Ed and Sal don’t have the work ethic Greg thought they did. His investment ends up going toward hiring a manager — an okay guy, the best they could find at the time — who runs the day-to-day operations of the company.

A couple of years down the road, when the going isn’t great, a private investor offers to purchase ESG Motorbikes for $100,000. Greg, having invested the most money, isn’t too happy about this plan, but Sal and Ed outvote him and decide to sell. Sal and Ed make a quick profit; however, because Greg’s membership certificate states that he owns one-third of the company and no special provision has been made for him in the operating agreement stating otherwise, Greg is only entitled to one-third of the proceeds from the sale of the business. Because Greg never took any profit from the company, he only gets roughly a $33,300 return on his $50,000 while his friends make out fat and happy. Greg’s risk in the venture exceeded his reward, while his buddies gained probably more than they should’ve. Had Greg required that they structure the operating agreement differently, he could’ve at least gotten his investment back.

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