So my business partner and I started an LLC last year, 50/50 ownership. I put in more capital upfront, but he handles a lot of the day-to-day. Now he wants to change the profit split to 70/30 in his favor because of the work he's putting in. I'm not totally against it, but it feels weird to separate ownership from profit distribution. Anyone dealt with this? How do you even structure that without it getting messy?
LLC
My LLC partner wants to split profits differently from ownership
LLCs can have different profit splits than ownership percentages if your operating agreement allows it. It's called a specila allocation. But you really need a lawyer to draft it, because the default rules in most states will screw you over if you don't spell it out.
Wait, he wants 70% of profits but you still own 50%? That sounds like he wants the upside without the risk. What happens if the company takes on debt or gets sued? Does he suddenly want 50% liability again?
Honestly this is super common. I've seen operating agreements where one member gets a preferred return first, then the rest splits differently. But 70/30 just for sweat equity is steep unless he's literally running everything and youre totally passive.
Is he actually doing 70% of the work though? Everyone thinks they do more than the other guy. Maybe track hours for a month before you agree to anything.
Also, if you do this, make sure the operating agreement has a clawback or sunset provision. Otherwise you're stuck with 70/30 forever even if he stops pulling his weight.
Just give him the 70%. You clearly don't want to do the work. (Joking. Kind of.)
@sandwich_enjoyer you're not wrong though. If OP is truly hands-off, then maybe it's fair. But that's a big if.
This is why you never do 50/50. Someone always ends up feeling underpaid. Good luck untangling it now.
One option: keep ownership 50/50, but do a profit-sharing plan where he gets a higher percentage up to a certain cap, then it reverts. That way he's incentivized but you're not permanently giving up equity value.
Do you have a buy-sell agreement? Because if you change profit distribution, you might also want to adjust the valuation for buyout purposes. Otherwise he could argue the business is worth more because he gets more profit, and you'd have to pay him more to exit.
Actually that's a good point. The profit split affects the valuation. If you're not careful, you're giving him a double win
Can we talk about how OP said "he handles a lot of the day-to-day" but didn't specify what OP does? For all we know, OP uust writes checks and shows up to meetings.
Even if OP is passive, capital is capital. If the partner wanted a bigger share, he should have negotiated that upfront or bought in more. Changing it after the fact is sketchy.
To clarify, I do handle sales and client management, but he's the one doing the operational stuff. I'm not totally passive. And we don't have a buy-sell agreement yet, which I'm now realizing might be a bigger issue.
Yeah, get a buy-sell and an operating agreement updated at the same time. Don't do one without the other.
Good luck. Sounds like you're in for a fun conversation.