Legal Question in Business Law in California

Re: operating agreement vs. employment agreement

Percentage of ownership is independant from salary and the agreement is a good idea to define your rights and obligations. Please contact my law firm if you need any additional information.

Re: operating agreement vs. employment agreement

The previous answers are both correct.

The LLC is a recently-created hybrid of the corporation and the general partnership. Traditionally, partners in general partnerships did not receive wages or salaries at all - they took only their respective shares of profits, as though they were sole proprietors. This could be varied by the partnership agreement, of course, but years ago this was not usual. Even today, partners are not entitled to salaries unless the agreement so provides.

As has been pointed out, in the corporate model, shareholders don't get wages or salaries unless they are also employees.

It's also been pointed out that LLCs are very flexible in structure, there being little governing law, and the arrangements for management and pay-out are left to the desires and negotiation skills of the participants, who must (by law) enter into a so-called "operating agreement." The operating agreement entered into by the participants determines who is a member, a manager, and the powers, duties and compensation of each.

So, there are few if any laws that say "It must be this way" for LLCs. I would say a reasonable operating agreement would normally provide for profit-sharing in proportion to investment AND for payment of salaries to members in relation to the value of services provided.

In other words, if BOTH you and your new 49% owner actively participate in the business, and you get paid, he should get paid as well. If you take only a share of the profits, so should he. But by the same token, if you are the only one working in the business, it would be proper for you to get a salary and Mr. 49% get none.

Re: operating agreement vs. employment agreement

Sounds like you need some decent legal advice and an agreement drafted so provide the answer to all those issues. The parties can agree on any split they like. Contact me if interested in doing so.

Re: operating agreement vs. employment agreement

Perhaps the best way to analogize this is to look at a corporation. The shareholders are equivalent to the LLC Members. They are not required to participate in the operation of the business.

Contrast that with the "Manager" which is the corporation equivalent of officers/directors. They are typically the corporation's employees and are paid according to the jobs that they are performing.

The members receive profits, typically after all expenses such as salaries, etc.

Sounds like you need a consultation.

Let me know if I can be of assistance.

Caleb

J. Caleb Donner

DONNER & DONNER

LEGAL WARRIORS�

910 Hamshpire Road, Suite R

Westlake Village, CA 91361

Tel: 805-494-6557

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Re: operating agreement vs. employment agreement

LLCs are flexible, though this flexibility should be reflected in a properly drafted operating agreement. Shares of profits and losses need not follow the ownership percentages. Additionally, apart from the ownership, salaries can be paid to employees or to employee-members (i.e., owners - again, this should be reflected in a properly drafted employment agreement(s)). You should hire a business attorney to ensure that they documents are in order.