Legal Question in Business Law in California

First of all, what kind of a company is it? The rules are different for partnerships than they are for, say, LLCs and corporations. Also, remember that ownership of a business is conceptually and legally different than employment by the business. A 40% owner can be a totally "silent" owner, or he/she may be president, CEO, managing partner or whatever. I'm sure there are ways around your dilemma, but without knowing more about the proposed business organization, I couldn't offer much useful advice.

I strongly agree with Mr Whipple. Your question indicates a lack of understanding of the economic, business and tax consequences of what you are doing. So, are you providing a profits or capital interest to the new "founder." this will determine whether he pays tax on his interest or not. What type of entity is involved. Is this the right form of entity for your business. What is he supposed to do for you and the company. On what terms could he be terminated. Why not just make him an employee rather than an owner. The questions to be addressed are so basic that no reasonable answer can be provided with the limited information given. Seek good business and tax counsel.