If I Have a Small % of Owner's Equity in a Biz, Does That Include Legal Liability?

[Biz Law]

What is the name of your state (only U.S. law)? Not sure, possibly DE

My question involves a new company being formed to operate a website. I believe it would be an LLC and not a corp.

The main contact person forming the company wants to buy something important from me to use in the business. I am considering asking for a small cash payment, and a % of "owner's equity" in the business, perhaps only 5%, plus a small % of gross revenue to be paid to me, perhaps 5% as well.

I've never done this before and I do not know what all the legal implications are if I have an "owner's equity" stake in the business, but I know that deals like that do occur for the type of sale I may be making.

If I do this kind of deal, would any "owner's equity" stake I receive also mean I have all the same legal liability the business would normally have for its actions and decisions, or does an "owner's equity" stake protect you from all that and simply mean you are entitled to a % of the value while having none of the liability?

 

[LdiJ]

What is the name of your state (only U.S. law)? Not sure, possibly DE

My question involves a new company being formed to operate a website. I believe it would be an LLC and not a corp.

The main contact person forming the company wants to buy something important from me to use in the business. I am considering asking for a small cash payment, and a % of "owner's equity" in the business, perhaps only 5%, plus a small % of gross revenue to be paid to me, perhaps 5% as well.

I've never done this before and I do not know what all the legal implications are if I have an "owner's equity" stake in the business, but I know that deals like that do occur for the type of sale I may be making.

If I do this kind of deal, would any "owner's equity" stake I receive also mean I have all the same legal liability the business would normally have for its actions and decisions, or does an "owner's equity" stake protect you from all that and simply mean you are entitled to a % of the value while having none of the liability?

Just some FYI information. Many businesses make little more than a 5% net profit after tax, therefore asking for 5% of the gross as your share could literally be asking for 100% of the profit. If you are going to do this, you really need to be asking for a percent of the profit rather than a percent of the gross.

Yes, being an owner opens you up to the liabilities of a business. However, depending on the nature of the business that liability could be very small, or could be easily overcome by ensuring that the company has a good business liability insurance policy.

 

[quincy]

What is the name of your state (only U.S. law)? Not sure, possibly DE

My question involves a new company being formed to operate a website. I believe it would be an LLC and not a corp.

The main contact person forming the company wants to buy something important from me to use in the business. I am considering asking for a small cash payment, and a % of "owner's equity" in the business, perhaps only 5%, plus a small % of gross revenue to be paid to me, perhaps 5% as well.

I've never done this before and I do not know what all the legal implications are if I have an "owner's equity" stake in the business, but I know that deals like that do occur for the type of sale I may be making.

If I do this kind of deal, would any "owner's equity" stake I receive also mean I have all the same legal liability the business would normally have for its actions and decisions, or does an "owner's equity" stake protect you from all that and simply mean you are entitled to a % of the value while having none of the liability?

Generally, an LLC or a corporation will protect its owners from personal liability. But the business must be structured carefully and properly operated.

Here is a link to the definition of "piercing the corporate veil," a legal doctrine that can make the personal assets of the owners of a business vulnerable in a legal action: http://www.law.cornell.edu/wex/piercing_the_corporate_veil

What I have bolded above of your post convinces me that you should hold onto your money until the person who intends to form the business has a business plan that you can sit down with an attorney in your area to personally review.

Good luck.

 

[Biz Law]

Thanks for these replies. This is very helpful.

I had accounting classes in college, and I heard a long time ago that when you make a deal for a % of the net instead of the gross, you might as well kiss it goodbye because there are so many ways in which the net can be rendered nil through various methods of accounting for expenses and so forth. So the advice I heard is that you should always make a deal for part of the gross, not the net.

These replies definitely help me to go in the right direction and seek the kind of knowledge I need to in case we pursue this kind of deal.

 

[quincy]

Thanks for these replies. This is very helpful.

I had accounting classes in college, and I heard a long time ago that when you make a deal for a % of the net instead of the gross, you might as well kiss it goodbye because there are so many ways in which the net can be rendered nil through various methods of accounting for expenses and so forth. So the advice I heard is that you should always make a deal for part of the gross, not the net.

These replies definitely help me to go in the right direction and seek the kind of knowledge I need to in case we pursue this kind of deal.

I would make sure that the person who is starting the business knows what he is doing, and that you are aware of your risks, prior to entering into any agreement. I recommend that you have any business contract reviewed by a professional before signing

Good luck.

 

[LdiJ]

Thanks for these replies. This is very helpful.

I had accounting classes in college, and I heard a long time ago that when you make a deal for a % of the net instead of the gross, you might as well kiss it goodbye because there are so many ways in which the net can be rendered nil through various methods of accounting for expenses and so forth. So the advice I heard is that you should always make a deal for part of the gross, not the net.

These replies definitely help me to go in the right direction and seek the kind of knowledge I need to in case we pursue this kind of deal.

I would never sign an agreement to automatically give a member or shareholder a percent of the gross. That gives them profits from the company even if there are no actual profits. Since most companies do not make a profit in their first year and sometimes even the first two, no way would I do that. That might be valid if you were to have no equity stake in the company, but its absolutely not valid if you want to also have an equity stake.