Legal Question in Business Law in California

Hello, Anne:

The question of ownership interests is entirely a matter of negotiations. As the creator of the idea, you are essentially in the driver's seat as to what to offer the others. Indeed, there is no law requiring you to offer any kind of ownership split. The programmers could be kept as employees, for example. You could certainly request a higher percentage than everyone else, or even a majority interest.

Each arrangement between you and the others involved has its advantages and disadvantages. The arrangement that makes sense for you can only be determined after some lengthy conversations about contributions to the business and future plans of everyone involved.

Your attorney's fees and costs will depend upon the complexity of the situation. A good attorney will not be afraid to estimate his or her fees whenever possible. Flat fee services are usually available for services and documents where the attorney can estimate fairly well how much time is required for the documents that must be provided. For instance, most attorneys can give you a flat-fee quote for creating a corporation, or for a standard 50/50 split between two people in a partnership or joint venture. Your situation sounds more complicated than that, however. Once you give the attorney an idea of what is involved, he or she should be able to provide at least a ballpark estimate of your fees. I would guess that a structure where you are the sole owner of the business and the others are employees would be less expensive to structure than a complicated LLC or corporate structure with the necessary shareholder or intra-ownership agreements.

You should also consider the investment of properly documenting everything as an investment or form of insurance, so that everyone is as clear as possible as to the terms of the relationship. It is much more costly to deal with a problem later on, when you have to resolve a problem arising from an oral agreement with people having vastly different recollections of the terms of the deal. You are also investing in the relationship with an attorney that you will likely need from time to time as your business develops and grows.

I disagree with Mr. Perry. The bare bones and rather vague facts you present in your question most certainly do not point exclusively to you being the owner and the others having no ownership other than what you negotiate with them. In fact if they have been working on this project doing programming without compensation, you are probably WAY better off dealing with them as partners, rather than anything else, because the other default option is that they will claim to be employees owed unpaid wages and overtime, or worse, independent contractors who own their work product until you pay for it. If you are serious about making a real business out of this, you need to get an attorney on board immediately.

I agree with Mr. McCormick to not treat them as employees as you may face a mutiny on your hands. I agree to treat them as partners to a degree, but not to forming a partnership with them, rather I recommend you form an S-Corporation and they would get shares issued to them to become part owners in the business. As an S-corp it would be like a partnership as the business is not taxed like a corporation as is a pass through (note California does have a 1.5% tax on distributions, whereas the IRS has 0% which is insignificant). Note there are annual taxes to the state with creating a business entity. But with an S-Corp, which for you might be what you're after, if you create a great product and some other company wants to buy the company you all would get bought out for your respective shares. With a partnership you could have a lot of trouble in that case. Otherwise the shares control the distributions. If you have 10% of the shares and do no work, you still get 10% of the profits. Thus if someone does 90% of the work with only 10% of the shares they still get 10% of the profit.

My cost of legal services for setting up the S-corp, issuing shares, articles of formation, etc. would be $1,500 (which is inclusive of the state filing fees). A partnership would be $1,000.