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Question added to topic Grow Your BusinessFebruary 13, 2009

How should I divide profits in an LLC?

I am starting up a software LLC and I am trying to figure out how profits should be divided. My partner and I want to divide ownership 51/49 percent, but I will be making ongoing payments to the LLC to pay for my partner's work and expenses.

How should I structure this new money coming in? Is it a capital investment? Should I give myself preferred stock? How about drafting loan papers to the corp?
Run -- don't walk -- to the nearest business attorney who works with software start-ups. Your question shows that you are mixing up important legal entity concepts (you don't have stock in an LLC, and it's not the same as a corporation), and it's not clear why you have to pay for your partner's work and expenses.

These issues could come back to haunt you in the long run if you don't get professional advice. You'll want an experienced eye to look at your arrangement to see whether 51/49 is really fair if you're putting in the money (so it seems), and your partner is putting in only sweat equity. In addition, depending on the capital you put in, there may be tax advantages to treating some of the money as a capital contribution and some as a loan -- so your tax advisor should also be on board to guide you.

Nina L. Kaufman, Esq. is an award-winning New York City attorney, edutainer and author. Under her Ask The Business Lawyer brand, she reaches thousands of entrepreneurs and small business owners with her legal services, professional speaking, information products, and LexAppeal weekly ezine. She also writes the Making It Legal blog.

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