Dividing ownership of an LLC (CA)

Hi all,

Two of my classmates and I are starting an LLC to help us get our many business ideas off the ground. We are considering one parent LLC with a different subsidiary for each "project" -- such as one subsidiary for gaming and software projects, another for b2b supplying projects, etc.

First, do the subsidiaries need to be LLCs themselves? Since LLCs seem somewhat cantankerous and expensive to start and maintain, I'm wondering if subsidiaries can exist as DBAs without the formality.

Second, on profit sharing, we had the idea to split profit from the parent LLC based on each owner's interest in the collective subsidiaries. For example, if I owned 30% of one subsidiary and 15% of another, my share in profit would be calculated based on my total shares of ownership. Is this a recognized way to split profit? Could the parent LLC's articles outline this in place of a general split at the parent level?

If anyone has taken on a similar venture, any input would be welcome.

Thanks!

First, do the subsidiaries need to be LLCs themselves? Since LLCs seem somewhat cantankerous and expensive to start and maintain, I'm wondering if subsidiaries can exist as DBAs without the formality.

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They ARE the LLC itself. They are not subsidiaries. The DBA rules will be the same as for LLCs.

Second, on profit sharing, we had the idea to split profit from the parent LLC based on each owner's interest in the collective subsidiaries. For example, if I owned 30% of one subsidiary and 15% of another, my share in profit would be calculated based on my total shares of ownership. Is this a recognized way to split profit? Could the parent LLC's articles outline this in place of a general split at the parent level?

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No. You have members of the LLC and you need to allocate profit based upon your membership agreement. While you can base the agreement on any economically real model (like the percentages you mention), they stay the same throughout the life of the LLC.

tranquility said:

They ARE the LLC itself. They are not subsidiaries.

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So to create subsidiaries of an LLC we need to create other LLCs, correct?

tranquility said:

You have members of the LLC and you need to allocate profit based upon your membership agreement. While you can base the agreement on any economically real model (like the percentages you mention), they stay the same throughout the life of the LLC.

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This might be a naive question, but could we update the terms of the agreement if we needed to re-allocate profit in the future? Say if someone's responsibilities change and they want a bigger share?

So to create subsidiaries of an LLC we need to create other LLCs, correct?

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If you want to create a distinct entity, you need to create a distinct entity. The LLC can own other entities.

When you start talking of "subsidiaries" you are talking something which will cost you a lot of money in compliance costs. Since owners can fiddle with transfers to hide income or capital gains, the accounting and tax rules can be quite complex.

This might be a naive question, but could we update the terms of the agreement if we needed to re-allocate profit in the future? Say if someone's responsibilities change and they want a bigger share?

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You have three owners of the LLC and each owns 1/3. Later A increases his work and asks for 40%. B thinks that is fair and it should come from C's share. They vote and, sure enough, 2/3s of the owners think the new proper ownership is 40% for A, 33.334% for B and 26.666% for C.

How do you think C is going to take it? Heck, while you're at it, how about A and B getting together and just voting C into a 0% ownership?

While you can "update" the terms under the law, you can't hurt minority interests for your benefit. Many have contingent payments to partners based on what they kill in the agreement as a way around the problem.

tranquility said:

If you want to create a distinct entity, you need to create a distinct entity. The LLC can own other entities.

When you start talking of "subsidiaries" you are talking something which will cost you a lot of money in compliance costs. Since owners can fiddle with transfers to hide income or capital gains, the accounting and tax rules can be quite complex.

You have three owners of the LLC and each owns 1/3. Later A increases his work and asks for 40%. B thinks that is fair and it should come from C's share. They vote and, sure enough, 2/3s of the owners think the new proper ownership is 40% for A, 33.334% for B and 26.666% for C.

How do you think C is going to take it? Heck, while you're at it, how about A and B getting together and just voting C into a 0% ownership?

While you can "update" the terms under the law, you can't hurt minority interests for your benefit. Many have contingent payments to partners based on what they kill in the agreement as a way around the problem.

Click to expand...

You also have the option of starting an S-Corp rather than an LLC, where stockholders would own shares. In that scenario, you would pay wages to the working shareholders, and adjustments could be made via the wages rather than the shares. If A is putting more hours into the company, then A can receive a larger wage, assuming that everyone agrees.

Or, you could even base the wages partially on some type of performance incentive (ie commissions for jobs brought into the company) so that from the get go, the amount of wages earned was commiserate to the amount of work achieved by each shareholder.