Monroeville, PA asked in Business Formation and Business Law for Pennsylvania

Q: Hey Guys,i own 10% of an LLC, while someone else owns 90%. If We bring a capital partner, where does he get his %?

Hey Guys, I am not sure the exact terms of this, but i own 10% of an LLC, while someone else owns 90%. We are talking about bringing in a capital partner somewhere in the 40% range. I was told that my shares will be diluted in the same according to my other partners. so of that 40% 4% would come from my shares and 36% would come from my partners shares. Is this correct? In this instance i would be selling my 4% of the company to this capital partner, do i receive the money for my 4% based on the valuation of the company ( Let's say 5 times cash flow which equates to about 2 million ) i would receive 80k? or does the money get all placed into the company and then after the company's debts are paid off i receive 4% of that number left?

2 Lawyer Answers

A: The answer is that this type of scenario is normally the subject of negotiation among the parties and depends upon the facts and circumstances of the situation, unless the operating agreement specifies exactly what happens in the event both members bring on another member. For example, assuming that the consideration being offered by the buyer is all cash, one party might have more of an interest or a need in receiving cash, and so the selling members might agree to vary a pro rata split of the membership interests in a sale. Also, if the company has debt, the selling members might agree that the proceeds are first used to pay off company indebtedness before being paid out to the selling members, or they might not agree and may leave the same amount of indebtedness in place post-sale (because the economic consequences to each selling member are different). Therefore, as you can see, there are a variety of factors to consider, and the terms of the operating agreement and interests of the different parties as well as the specific facts involved impact how the scenario might ultimately play out.

Peter N. Munsing
Peter N. Munsing
  • Wyomissing, PA
  • Licensed in Pennsylvania

A: These things are complicated and further have tax consequences. You really need to consult an attorney that handles business law issues/'small corporations. I assume you have at least consulted a CPA? If not consult. The internet is a useful reference tool but for guidance you need to break down and actually speak with an attorney.

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