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RE: [newtech-1] Partnership Question

From: Ron F.
Sent on: Saturday, February 2, 2013 4:38 PM

There actually can be a way to "check the box" (at least for federal income tax purposes) to be taxed as a C Corp with an LLC entity structure, but that kind of defeats the principal benefit of selecting an LLC in the first place (i.e., ability in certain cases to use the losses to offset other income and avoidance of double taxation).  By the way, if you plan to raise outside capital from VCs in the foreseeable future, C Corp is usually the best way to go  


From: [address removed] [[address removed]] on behalf of Anthony Zeoli [[address removed]]
Sent: Saturday, February 02,[masked]:53 PM
To: [address removed]
Subject: Re: [newtech-1] Partnership Question

Oooh, didn't know this about the tax situation, where whatever profits pass through, that all unit holders are responsible for taxes on that income. I was just about to do the LLC, but now I'm going to go back to the C Corp drawing board.


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On Sat, Feb 2, 2013 at 2:55 PM, Ron Fleming <[address removed]> wrote:

It actually is a big deal that its an LLC, in that (among other things) there may be important tax consequences (e.g., as a member, you will generally be taxed on a pass through basis for any earnings the startup may have, without regard to whether those earnings are actually distributed to you, so generally you want to make sure the operating agreement provides for tax draws so that you have cash to pay the taxes).  Also, in the LLC context, if the equity units are awarded as "profits interests", then you will generally will NOT be taxed on receipt of them; conversely, if they are "capital interests", you would generally be taxed IMMEDIATELY on the value (without any cash proceeds to PAY the taxes). 

 

Other key issues include corporate governance (e.g., are you entitled to board representation? can you be removed from the company? are there more than one class of equity interests?), tag along rights on exits/sales by the other two members, restrictions on your ability to dispose of your equity interests, anti-dilution protection, any vesting provisions for your units, any put or call rights that may be baked into the LLC agreement etc. 

 

LLC operating agreements tend to be more complex than the typical c-corp arrangements, lots of pitfalls and traps.

 

Ron Fleming | Partner
Co-Head Emerging Companies
Pillsbury Winthrop Shaw Pittman LLP
———————————————————————————————————
Tel: [masked] | Fax: [masked]
1540 Broadway | New York, NY[masked]

Email: [address removed]
Bio: www.pillsburylaw.com/ron.fleming
www.pillsburylaw.com

 


From: [address removed] [[address removed]] on behalf of Carrie [[address removed]]
Sent: Saturday, February 02,[masked]:36 PM
To: [address removed]
Subject: Re: [newtech-1] Partnership Question

Congrats on your offer!

Not really a big deal that's it's an LLC (your agreement will read "units" instead of "shares"). I would just make sure that the operating agreement doesn't make it difficult to convert to a C-corp because some investors will require that (assuming the company will need to raise at some point). 

Two quick answer to your questions: 

1  Yes, you should have an attorney review the documents (don't let them talk you into nitpicking things, but make sure there's nothing out of the norm in there and that you understand all the provisions). 

2. There's always room to negotiate. Just be prepared to offer something in return and to think creatively. For example, if you want more equity offer to take a little less salary off the bat or ask to talk about options tied to performance. I'm personally a huge fan of performance-based agreements because it's a way to show that you have skin in the game without putting up money (which aligns everyone's interests and is likely to endear you to the founders). 

I recommend talking to someone in a similar role to find out what fair terms would be. 

Sent from my iPad

On Feb 2, 2013, at 2:09 PM, "Ben Reeves" <[address removed]> wrote:

Hi Everyone,

I have just received an offer to join an online media company as their executive editor and an equity partner. However, I am new to how these arrangements work, and I was wondering if anyone could offer any advice on negotiating a partnership relationship. The company is an LLC, and there are currently two partners: a principle shareholder (and founder) and the CEO. I would be the third partner.

They aren't asking me to contribute any money at this time because they're doing a soft-launch of a new product which I will oversee, but there is a strong probability that my role in the company (and my financial stake) may grow in the next six months to a year.

Anyway, I would really appreciate any advice you might have for someone just starting out in the business world. Do I need to have an attorney review the agreement? How much negotiating room do I likely have? Are there any specific arrangements I should avoid?

Thanks so much!

Best,

Ben




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