Legal Question in Business Law in California

Two business owners decide to bring on a third partner. Partner 3 buys in at 15k and all three form an LLC.

A month later during growth, partner 1 and 2 bring 10k each for equipment funding. Partner 1 and 2 feel that Partner 3 needs to invest the same. Partner 3 believes that they have given 15k already and that partner 1 and 2 still need to bring another 5k each to keep things equal.

Who is correct in this?


Asked on 1/22/17, 5:04 pm

2 Answers from Attorneys

Bryan Whipple Bryan R. R. Whipple, Attorney at Law

First, let's be cautious about calling 1, 2 and 3 partners. They might have been partners before the LLC was formed, but LLC members are not partners in the legal sense. Next, a properly-formed LLC should have an operating agreement between the owner/founders who are now its members. The operating agreement should cover matters such as what happens when additional funding is required, e.g. whether the members can be required to invest additional money, and whether additional money will be treated as ownership (equity) or a loan (or possibly even a gift). Failing an agreement requiring additional investment, or even an informal understanding, (a) there is no obligation to "put in" more money either as a loan or as equity, and I also believe a court would hold that voluntarily-contributed money was a loan and did not affect ownership. All in all, it sounds as though this LLC is too informally organized, and the members need to pay more attention to negotiating the required written agreements and doing formal planning for its future.

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Answered on 1/22/17, 5:28 pm

I agree with Mr. Whipple 100%. In the absence of an LLC Operating Agreement there is no legal answer to your question. It seems 1 and 2 and now 3 have been operating without dealing with the necessary legal formalities. All issues regarding future contributions should have been addressed at the time the LLC was formed. At this point all you can do is negotiate what you are going to do now and then put a proper Operating Agreement in place to deal

With future issues.

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Answered on 1/22/17, 9:15 pm


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