Business Law

Steve is a 52-year-old mechanical genius. He has just invented a device sure to make a million, a billion! It is an automatic laundry sorter that utilizes nanotechnology to determine color, weight and size and will be every person's dream gift. This is not Steve's first invention, and he has become seriously wealthy with prior clever ideas. At this point in his life, he has a big income from prior projects, a huge house with no mortgage, a wife and five kids under the age of 18. Two of the kids are teenagers that seem to have inherited Steve's interest in technology. The problem with Steve is that he is pathologically shy, and has no clue how to get his product out there in the marketplace. He has decided he no longer wishes to use his prior partners, attorneys or contacts to market this new device.

Steve meets Ben. Ben is only 21 years old, single, rents a one-room apartment where he lives with his cat, and is fairly eccentrichis main passion in life is participating in dodgeball tournaments. He has already run through three different franchises and came close to being indicted for Internet stock fraud when he was only 16. He is, however, a marketing geniushe is the brains behind three of the great marketing ideas of the last three years. He has never saved a centhis personality is such that he ends up alienating his employees or partners and because he does not trust attorneys, he has never gotten the ironclad legal agreement that would protect him when these partners throw him out of the business.

Steve and Ben meet at a cat show, and although they really don't know each other well, they recognize that each has what the other needs, and they decide to go into business together. Steve at first wanted to just hire Ben as a marketing consultant, but Ben does not want to just be Steve's employee. Ben wanted to take an option on Steve's invention, but that was not agreeable to Steve. Some sort of business formation is the key, but the question is what form of business?

Here are the proposals from Ben and Steve. an agreement that will suit both parties?

BEN'S PROPOSAL

I hope this letter finds you well. After examining your and Steve's strengths and resources, a Limited Liability Company (LLC) is the best structure for your business.

Your niche as a marketing genius makes you the obvious choice to head brand creation and the implementation of a robust marketing strategy. Your unique ability with marketing and promotion and your charismatic personality will be a significant asset when collaborating with Steve. On the other hand, with his inventiveness and mechanical genius, Steve is best suited to lead R&D, production management, and quality assurance. His technical ability and past business and invention experience will complement your marketing skills for the benefit of you both.

Considering you and Steve have diverse backgrounds, strengths, and levels of capital, an LLC structure is well-suited for your business. It allows you to leverage your respective strengths while minimizing personal liability and offering tax flexibility. The primary reason an LLC is the best fit for your business is that it offers a unique combination of characteristics from both corporations and partnerships. An LLC structure shields its owners from personal liability for business debts and obligations, which is a crucial advantage. Do be aware, however, of potential disadvantages associated with LLCs, such as higher formation and maintenance costs compared to sole proprietorships or general partnerships. States often charge initial formation fees and impose ongoing fees, such as annual reports.

Additionally, I'd like to highlight the importance of having a well-crafted operating agreement as it can provide clarity on the distribution of shares and other critical aspects. This legal document needs to address several points, including management structure, ownership structure, tax election, business succession matters. Given Steve's substantial financial resources, it's likely that he will be a major investor, potentially holding a majority ownership stake, for example, 60%, with you holding the remaining 40%. An LLC also supplies significant flexibility, including tax flexibility. Unlike corporations, an LLC does not pay federal taxes on its income as an entity. Instead, income, losses, deductions, and credits flow through to the LLC's owners (referred to as members) based on their respective ownership interests. You and Steve can also determine the distribution of shares based on various standards and can opt for either a member-managed LLC, where you and Steve manage the day-to-day operations, or a manager-managed LLC, where you hire outside parties as managers. In case of an unforeseen circumstance like the passing of a member, the operating agreement can outline how the business should proceed. For example, Steve's shares will pass to his heirs if he predeceases you and you may want to include a provision allowing you the right of first refusal if Steve's family decides to sell the shares. Ownership transfer can also be more complex, as all members typically need to approve adding new members or altering the ownership percentages of existing members unless stated otherwise in the operating agreement.

In conclusion, I believe that establishing an LLC and creating a comprehensive operating agreement is the best way to move forward with your business venture. If you have any questions or require further clarification, please do not hesitate to reach out to me. I am here to support you every step of the way.

STEVE'S PROPOSAL

In representation of Steve,

I found that the formation of an LLC would be the most advantageous for their business. In terms of management, liability, taxation and inheritance, it made the most sense to go with that type.

Management structure for an LLC should be in the operating agreement. Members are able to delegate managers who are not required to be members of the LLC. Seeing how Steve has a more introverted style, it can benefit him to delegate managerial positions, as well as Ed, seeing how he has issues with previous employees and partners. If they so decide, they can be member-managed, where decisions are made by majority vote of members. The other option is manager-managed, where non-manager members have no rights except in certain situations, such as amending the operating agreement or consenting to merge with another entity. As mentioned, the operating agreement can provide further information on how to govern relationships.

In determining liability, in an LLC formation, all members are liable to the debts to the extent of their capital contributions and equity in the firm. They have no personal liability beyond that. If a goal is to protect assets, they should invest in insurance. A type of insurance they should consider is Commercial General Liability. It is a broad form that covers obligations to pay for damages of "'bodily injury' or 'property damage' caused by an 'occurrence (Sec. 36-2a).'"

As for taxation, they pay no federal taxes on income as an entity. Any income, losses, deductions, and credits go through members based on proportionate interest in the company. Each member reports the income on their personal tax returns. This is an advantage because it combines the tax advantage of limited liability features of corporate form.

In terms of inheritance, a will would be a strong suggestion for Steve to have since he has children he can name as beneficiaries. Interest in LLC is personal property and is generally assignable. The right to participate in management is not transferable without the consent of other members