NLIC.org

Dan Said:

is it possible to start a LLC with 2 members and 7 limited liability investors ?

We Answered:

The strength and weakness of an LLC is its flexibility. You can do almost anything with it, in terms of structuring corporate arrangements, but you need to have a well written operating agreement to do so because, unlike corporations, LLCs do not have a well developed set of default rules covering governance.

1.Is it possible to have different types of members (i.e., your family versus the outsiders)? Yes. You need to have the operating agreement specify that certain members receive different types of membership interests (for instance, Class A versus Class B Units). The units can have different voting rights and different economic rights.
2.Will it be possible to sever relations with an investor if things do not work out? Yes. You will need to draft in the operating agreement buy-sell provisions (i.e., that in certain events that you can buy them out at either a specified price or according to a specified procedure (valuation)). You can also structure rights of first refusal (i.e, if an investor wants to jam you by selling to someone you don’t know, you can block them by buying them out).
3.Can you pay them dividends and salary? LLCs don’t give dividends – they give distributions. But yes, you can authorize distributions in any way you see fit, so long as you are not distributing so much out of the LLC that it is insolvent (much like dividends, if you bankrupt the company to give you and your investors all the cash before you declare bankruptcy, that’s illegal). If they are involved in the daily operations, however, note that technically they are not paid salary because they are active members of what is a partnership for tax purposes – instead they are self-employed and have to pay self employment tax. You will also have to pay self employment tax if you pay yourself “salary” from the LLC. You need to consult an accountant/tax lawyer to make sure you do that properly. There are rules as to what level of participation then transforms someone into someone ineligible to be paid a salary from an entity he is a limited partner or member of.
4.In summary, yes, you can structure an arrangement where you and your family have units that have voting control but your investors have some economic rights and security in the event of bankruptcy or key events. You would need to get a well written operating agreement written by a lawyer -- if you just form the LLC and either have no operating agreement written or use some shlock one with no buy-sell, no distinction between types of classes and no distribution mechanisms then none of the above things will apply. I watched a large multimillion dollar operation have to buyout one member at a GIGANTIC premium because they claimed to have all these arrangements but they never had a written operating agreement so technically they were all equal members with no differences in voting or economic rights. Sucks for them. Don’t let it happen to you.