Question about forming an LLC and protecting my interests

I would like to form an LLC with my business partner. He is contributing his business contacts while I am contributing software that I wrote. Our business will consist of licensing the software I wrote to his business contacts. He wants to split revenue 50/50, but I believe that is unfair to me. He is also a programmer, but made no contributions to the software I wrote. Our business plan is to create additional software ‘modules’ as well. How can we fairly distribute revenue earned from each module? Can we setup an operating rule that will give majority of revenue to the writer of module

Asked on June 26, 2009 under Business Law, Indiana

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 11 years ago | Contributor

You can split revenue ANY way you want, and note that revenue splitting does not need to mirror ownership or control; i.e. you could both own 50% of the company, but one of you gets more than half any revenue. Here are some ways to do it--when you figure out what general approach you like, the attorney crafting the LLC can draft it into the operating agreement for you:

1) Profit is split in some predetermined, mutually agreed to percentage: 50-50, 60-40, 70-30, you just need to figure it out.

2) Any profit is evenly split, but if the partners also are employees of the LLC and draw salaries, one gets a larger salary.

3) Profits and/or salaries are generally split evenly, but first there is a "royalty" taken right off the top of revenues and given to the partner who had written the software; e.g. there's a 10% royalty, so if you make $100k sales, $10k goes to the author, then the other $90k to the company.

(Note: # 3 would also work as a sales commission--if you wanted to give the partner who closed a deal a cut right off the top, you could structure it the same way.)

4) The writer of the module is paid a flat fee by the company for creating it.

There are other ways as well; the important points to remember are (1) LLCs are flexible arrangements--decide what works best for you and you can set it put that way; (2) control and profit are not the same--you can adjust pay or profit without affecting ownership and control, if that's what you want.


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