What is the name of your state (only U.S. law)? UT (Business owner is in NJ)
I have been reading up on my question over the last couple of days and have learned a lot, but I can't find a definitive answer to my question.
I developed a software a few years ago and was approached by a startup to acquire the software. We have come to an agreed upon amount for the software - $20K upfront and 9% of the business ($180,000 in value or $20K per 1%). He came to this number by valuating the business at $2 million, which doesn't make sense to me since he has no customers or revenues yet... The business is an LLC and is just getting off the ground. Today the owner told me I would be a "silent partner" and would not be entitled to any distributions (profit or loss) until the business was transferred to a corporation.
When I responded that I would only accept a normal 9% ownership (with normal distributions) he stated I would be responsible for 9% of all future cash generation for the business if necessary.
Based on my understanding, my capital account would start at $180,000 with 9% ownership. I believe he has invested around $50K of his own money, which based on my understanding would put his capital account at $50,000 with 91% ownership.
If cash does need to be generated in the future and he puts his own money in would that deplete my capital account by my percentage? (i.e. he puts in an additional $50,000, which in turn puts a $4,500 debit against my $180K) If this is the case then wouldn't I also receive that 9% as a loss on my K1?
If this is not the case, then would he have to make up the difference in capital accounts effectively requiring him to influx up to 91% of the invested cash into the business before it begins to negatively impact my capital account?
It seems strange if I have invested so much more "capital" that I would be impacted negatively by any cash invested by him.
Any clarification would be greatly appreciated.
I have been reading up on my question over the last couple of days and have learned a lot, but I can't find a definitive answer to my question.
I developed a software a few years ago and was approached by a startup to acquire the software. We have come to an agreed upon amount for the software - $20K upfront and 9% of the business ($180,000 in value or $20K per 1%). He came to this number by valuating the business at $2 million, which doesn't make sense to me since he has no customers or revenues yet... The business is an LLC and is just getting off the ground. Today the owner told me I would be a "silent partner" and would not be entitled to any distributions (profit or loss) until the business was transferred to a corporation.
When I responded that I would only accept a normal 9% ownership (with normal distributions) he stated I would be responsible for 9% of all future cash generation for the business if necessary.
Based on my understanding, my capital account would start at $180,000 with 9% ownership. I believe he has invested around $50K of his own money, which based on my understanding would put his capital account at $50,000 with 91% ownership.
If cash does need to be generated in the future and he puts his own money in would that deplete my capital account by my percentage? (i.e. he puts in an additional $50,000, which in turn puts a $4,500 debit against my $180K) If this is the case then wouldn't I also receive that 9% as a loss on my K1?
If this is not the case, then would he have to make up the difference in capital accounts effectively requiring him to influx up to 91% of the invested cash into the business before it begins to negatively impact my capital account?
It seems strange if I have invested so much more "capital" that I would be impacted negatively by any cash invested by him.
Any clarification would be greatly appreciated.
