Business-Minded Legal Solutions

Is it time to renegotiate partnership or LLC percentages?

In the early stages of a partnership or LLC, it is easy to see your venture with complete optimism. When you are excited about a new opportunity, you may not see the need for changes in the future.

As you and your partners started your business, it seemed like your workloads and contributions to the enterprise were fairly apportioned. You may have been doing different jobs, but the distribution felt appropriate. As your business changes, there could be a time when you need to change the cash distribution waterfall and voting rights to better reflect your new reality.

These are some of the signs it could be time to renegotiate.

The workload has shifted

During the initial stages of your business, the demands on each partner’s time and skills may have been higher than it is now.  Or, a partner who wasn’t anticipating taking an active role may have moved into a day-to-day position. When you first negotiated your partnership or LLC you may not have had clarity about your respective long-term roles.

Now that your business roles have changed, talk to your partners about your long-term goals. If there is an unfair balance of work, it might be time to renegotiate profits distributions and, potentially also voting rights.

If your partner is not willing to change cash allocations, consider restructuring your responsibilities to align better with the flow of funds.

Some partners have more risk

All businesses require capital. Your percentage interests might have been based off your initial investment and anticipated contributions.

Depending on the changes in your business, additional contributions may have been made disproportionately and not in accordance with ownership. A partner who has provided more cash or who has guaranteed the company’s debt has taken on more risk.

When one or more partners add money out of proportion to their ownership, consider shifting your distribution waterfall to reward that extra contribution and match the level of risk. This may take the form of a priority return to the partners who have more risk, a greater overall return, changed voting rights, or some combination.