How to Pay Yourself in a Multi-Member LLC - 5 Biggest Mistakes!

are you and your business partner wondering how you should be paying yourself and your multi-member LLC today I'm going to explain to you exactly what you need to do the five steps you need to take to make sure that both you and your business partner can sleep better at night knowing that your LLC is properly taken care of and that you're each being paid adequately based on your work in the business that sound good let's do it are you looking for legal guidance and practical business tips without spending thousands of dollars on high-priced lawyers and law firms hi my name is Jim Hart and the founding attorney here at Hawthorn law we help online businesses and small business owners to protect their business without spending a small fortune in both time and money so that you can focus on what matters most and that's building something that truly matters in the world if you're interested in legally protecting your business and building it the right way then go ahead and click the subscribe button down below and don't forget to hit the little bell thing so that you can notify when we publish new videos each and every week and also especially for this video if you are in business with somebody else which I'm sure you are you wouldn't be watching this video make sure you share this video and my channel with your business partner so that both of you can be on the same page about how it is that you need to run your business legally to make sure things are in order so today I want to talk to those of you that are in business or somebody else about what you need to do to protect yourself and your business when it comes time to pay yourself this is a really hot emotional topic for a lot of businesses when there are multi members of that LLC now if you're not in business with somebody else if you have a single member LLC which means that you're in business by yourself and you want to check out my other video on how to pay yourself in your single member LLC I just updated it for 2019 so link up there now if you are in business for somebody else you know how hard it can be it's basically like marriage without sex unless that is that you're in business with your spouse in which case you're a single member LLC in the eyes of law you may not have known that but you are so espoused to spouses together that's still a single member LLC that's not a partnership I bet you didn't know that did you so for the rest of you who've decided to go into business with somebody that is not your spouse this could be a boyfriend or girl this could be a colleague professionally or personally this could be a friend this could be a family member this could be somebody you met in college or university this video is for you whomever it is that you're in business with you need to make sure that the two of you are on the same page about how you're going to pay yourself with your multi-member LLC this is an incredibly important decision that you need to make you need to be an agreement about how and when each of you are going to get paid and how much you're going to get paid if you can't agree on this it's going to lead to a lot of infighting between you with the business it's going to lead to problems regarding how you're going to be spending the money in the business it's going to lead to a lot of animosity between the two of you and and ultimately it could tear down both your friendship if you were friends before you got into business and it could turn her down the business itself which is a problem and that's something that you want to avoid I'm sure so obviously there's a lot at stake here by the end of today's video I'm going to talk to you about the five things that you need to include in your operating agreement to make sure that all these things don't happen for you and your business but before we get to that quick water break today again I don't have my coffee into water from my mega tub by the way I love these things I don't know if you know but this is like a Yeti knockoff and these things keep your water cold for hours even if it's in a hot car amazing so in many of my videos I talked about the importance of having a solid operating agreement and that is never more important than when we're talking about a situation where you have a multi-member LLC now I say multi-member LLC but this could also be a corporation with multiple shareholders it doesn't necessarily have to be an LLC or it could just be a general partnership where you have any reformed a corporate entity but you have multiple partners in the business basically the idea of the operating agreement here is that you need to agree to all these things before you start operating business it's kind of like again I'm gonna go back to the the analogy of a marriage having a prenuptial agreement before you get into the marriage to make sure the marriage goes south that you know how you're gonna handle things now if you are a single member LLC you don't need to spend a whole lot of time on this because if you ever need to make a change the operating agreement you just make the change it's it's a it's a living breathing document that can change as as times change but if you are a multi-member LLC and you want to make a change to your operating agreement you need to think long and hard about how you're going to do that because there's somebody else on the other side that might have a say in whether or not you want to make a change to that agreement and that's your business partner in the course of a multi-member LLC you can't just change the agreement anytime you want all of you need to agree and that's why it's important to get these things down at the outset so here are some of the main issues that you're going to need to face when negotiating an operating agreement for a multi-member LLC and this is specifically in regards to what you need to do in terms of getting paid there are a bunch of other issues that you're going to need to negotiate but these are the most important issues you're going to need to deal with when you're talking about how you and your business partners are going to get paid ideally you would agree to all these issues before you number one invest money into the business or to start actually operating the business sometimes that's not possible some of you are probably watching this video and you've been operating for years and now you're wondering what you need to do well you need to get operating agreement in place as soon as possible before there are any problems with your business so let's go through these five issues that you need to deal with real quick number one how are you going to get paid are you going to have a set salary or you're gonna get paid based on a percentage of revenue or are you going to get paid when the business is profitable are you gonna get paid based on commissions how are each of you going to get paid that is the number one decision you need to make the second option is pay split how are you going to divide up the pay are you gonna be paid each 50/50 or you each equal gonna be taking equal draws from the business or are you gonna be doing something else third option what if one of you stops pulling your weight one of you what if one of you just steps away from the business and decides I'm done with this business I want to go somewhere else but you still that person still owns 50% they're still legally entitled to their cut what do you do then fourth option bonus is when and how are you going to pay them and fifth option you need to include some buyout provisions so let's go through those one at a time the first issue that you need to negotiate is pay options and how are you going to get paid a multi-member LLC is very similar to a single-member LLC and then you get paid basically by writing a djaq are transferring money from the business bank account to your personal bank account but how do you decide when that is going to happen and how much is going to get paid at the time that that happens you can do this either by just writing a check to each of you from the business or you can do that by each of you having a set salary but let's say you set a salary let's say your salary is $5,000 a month and each of you are supposed to give $5,000 plus payroll taxes of course so that's gonna be roughly 1,100 me $11,000 a month well what if the business didn't make that much money and what if there's not enough money in the operating account to pay that salary or what if there is enough money in the operating account to pay that salary but one of you decides that you know what I don't want to take a salary this month because I want to leave the money in the business because the business needs that money to invest in advertising equipment employees whatever it is you need to pay and what if the other person doesn't agree with that what are you gonna do so that's the number one issue is how are you going to agree to pay yourself now I've talked about this before but my advice is generally speaking you should look at the profit first formula by Mike michalowicz and pay yourself according to that you don't have to do it that way you can do it any way you want but that's something that I highly recommend you take a look at the second thing that normally comes up is the pay split and this is how much are you gonna pay yourself versus how much you're gonna pay your partner this can frequently become a problem later on down the road where one person is pulling more weight than the other person in other words let's say one person is doing all the marketing and they're bringing in all the clients and the other person is doing all the backend work and so the person is doing the marketing feels like they should be paid more because they're the ones responsible for doing all the rain making for the business but the other person feels like maybe they should be paid more because without them you wouldn't be able to deliver on the products or services that you're providing to all those clients and so there can become discrepancies about how that's going to work and that can be a big problem so you need to decide from the outset how are you going to split up the pay another time where this can become a problem is where one person has basically put in more money into the business and the other person has put in more sweat equity well initially it might you might agree that that's gonna be a 50/50 split but what happens when a year or two down the road the person is doing this what equity sweat equity is doing all the work for the business and it's grown substantially and now they're gonna play where they can basically buy out the person who just provided the financial capital for the business but that person doesn't want to be bought out they just want to continue to get 50% of their cut what do you do with that situation that is another big problem that comes up that's something you need to agree on ahead of time is it going to start 50/50 and then slowly change over time or are you gonna start out at 40 60 or something else or 60 whatever you decide to do you need to make sure you have that in the operating agreement the third issue that comes up is what happens if one of the partners stops pulling their weight in other words let's say they have another opportunity that comes their way and they decide they no longer want to be in your business or they don't think your business is going to be successful and they want to step away or let's say the two of you actually are married and you get a divorce and then one of you decide you don't want to be in the business anymore because you got divorced there's all sorts of issues that can arise when you're in a business with somebody else and you need to figure out what you're going to do if one person decides to step away and how do you define stepping away if they're gone for six months and then they come back or you know if they're gone for a month and then come back or if they're gone and they just never come back how do you define that those are issues that frequently need to be resolved and put into an operating agreement so that you can hammer them out ahead of time so that you can avoid potentially costly litigation from a disgruntled partner if they've moved away from the business but they still feel like they're entitled to distributions from the business the fourth thing you need to decide is bonuses so let's say you've got the salaries figured out but your salaries are low at the end of the year you want to take a distribution from the business but how much are you gonna take how are you going to decide when you're going to take that what benchmarks do you have to hit to make sure that happens these are things that need to be decided and agreed to in advance in the operating agreement and kind of in line with this you need to think about well what if you do start your salaries out really low and you decide you want to change them later on how are you going to decide that you are at a point where you do want to change those salaries and make them bigger or whatever alright the fifth thing you need to look at is buyout provisions so typically if somebody does decide to move away from the business and go on and do something else you want to know what are you going to do in terms of a buyout provision are you gonna have something in place in terms of that person moving away is that kind of the open-ended that's something that you really need to think about because if it comes time where somebody does step away from the business you can avoid a lot of like a seg costly litigation by agreeing to something in advance so that you can make sure that doesn't become a problem later on so I've also written a short one-page recap of all of these options for you and I'll include a link down below in the description make sure you check that out also I almost forgot I don't frequently give plugs but I do have a link down below to an operating agreement that you can use this is for a single-member LLC but it can easily be modified for a multi-member LLC and so check that below if that's something you're interested in now this is the third video in a series I've done about how to properly and legally operate your LLC if you'd like to check out the first two videos go ahead and click right here and you can check out the entire series and don't forget to share this video with your fellow entrepreneurs would really appreciate it thank you so much we'll see you in the next video

Channel: Hawthorn Law

Views: 51,921

Rating: 4.872983 out of 5

Keywords: multi member llc, limited liability company, llc operating agreement, operating agreement template, llc formation, operating agreement for llc, multi member llc operating agreement, operating agreement, multi-member operating agreement, how do i start an llc, profit first, starting an llc, start an llc, how to pay yourself llc, how to pay yourself as a business owner, how to successfully start an online coaching business, reasons why online businesses fail, how to get your llc

Id: gSIHs3YdUzE

Length: 12min 2sec (722 seconds)

Published: Wed Jun 05 2019