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  1. #1
    Join Date
    May 2014
    Posts
    3

    Default LLC Ownership, Employment and Overdue Wages

    My question involves business law in the state of: California

    This is somewhat complicated, but I would greatly appreach some legal knowledge regarding my weird ownership/pay situation with the LLC I work for.

    The LLC I work for was originally founded in January 2010 with 3 partners (that is, these are the 3 names on the official LLC paperwork on file with the state - I am not one of these partners). Since we were an unfunded start-up (we make video games and apps), the president told the rest of us that we would earn sweat equity for our lack of pay until we start making money and were able to start a proper payroll. Cool, we all agreed (weíd worked together before - we knew it was a start-up).

    Once the company started making money and we started getting paychecks we stopped building this sweat equity. Basically, our missed pay in 2010 built sweat equity, but our missed pay since then has not. Itís simply debt the company owes the employees. I built a 3% stake off my ~6 months of missed pay in 2010. Currently, Iíve got a 5% stake (I got a boost as part of a raise) and am owed another ~6 months of pay from 2011 till today.

    Legal issue #1: Iím pretty sure it is illegal for a company to not pay its employees, so what can I do about this? The company doesnít have the money in the bank to pay me flat out, so thatís obviously not an option. Which leaves the idea of getting paid back over some period of time. Suing would probably destroy the company (no money, no real assets...) and cost me a lot of money, quite likely making it not financially viable.

    With that in mind, I sat down with my boss the other day and told him that I need to start getting paid back and that any future missed pay or late pay is unacceptable. My ideas were:
    a) He could simply double my paychecks until Iím paid back in ~6 months
    b) I could take a leave of absence while continuing to get my normal paycheck and once Iím paid back we could decide if I come back to work or I just leave altogether.

    He refused both of those ideas saying that he would not treat me differently from the other employees (ie: this would be the company paying me back but not the other employees, making it unfair to the other employees). He did, however, bring up a few ideas:
    a) I wait until the company has money and get paid back in parallel with all the other employees (Who knows when that would happen, could be years)
    b) I quit and he arranges a payment plan (with his numbers it would take 2 years to pay me back - unacceptable in my opinion)
    c) I become a contracter and get a much larger salary (ie: 50% increase) and that extra pay would go toward paying me back.

    Legal issue #2: He said that if I am no longer an employee then I would lose my ownership. So, options B and C involve me flat-out losing my 5% stake... according to him. What legal grounds is there where he can do this? I guess the better question is, what is the real legal power he has regarding ownership? And what power do I have?

    While debating this issue with him, he said that you canít legally own a stake in an LLC if your are not an employee at the LLC (his reasoning for why I would give up my stake - Iíd no longer be an employee). My retort to this was that our ďownershipĒ is likely not legally done anyway, as we have no paperwork other than emails and such simply saying "you have X%", that normal legal rules probably donít apply anyway. Also, that I was pretty sure that LLCs could only have like 3-5 owners and thereís 20-30 other people with "ownership" stakes now. He countered by saying that LLCs could have up to 80 owners (I haven't been able to verify this information with any of my Google powers - I'm skeptical).

    Anyway, my main goal is to a) get paid back in a timely fashion and b) not freely sacrifice my ownership in the process. Staying employed with the company isnít a requirement, but it would be nice to not have to sue or otherwise make things too unpleasant/messy for everyone.

    Reasonably, I would expect to get paid back within 6 months (since itís 6 months pay missing) and that my ownership would either continue to be mine or that the company would buy it back at the rate at which I paid to acquire it (which equates to roughly 2 months pay per 1% ownership if my math is correct - or $15k per 1%). Is this possible? I like my boss, I donít think heís trying to screw meÖ but at the same time, this company is managed really poorly and Iím just over it. I'm fine moving on.

    Thanks for reading this mess, and thanks in advance for any advice!

  2. #2
    Join Date
    Jan 2013
    Posts
    372

    Default Re: LLC "Ownership" and Missing Pay Situation

    Can you describe what your "sweat equity" is? What is a 5% stake? You do not own shares, what do you own? How do you handle this with the IRS at tax time?

  3. #3
    Join Date
    May 2014
    Posts
    3

    Default Re: LLC "Ownership" and Missing Pay Situation

    The "sweat equity" is the term our boss used to describe the equity/ownership we earned when we were initially working for free. The more missing pay we got in that first year, the larger the equity/ownership stake we got.

    Our "ownership" stakes have never been clearly defined. At some point, a couple of years ago, my boss sent everyone a document that said something along the lines of "This document says you own 2.96% of the company which equates to 29,600 shares, assuming a current valuation of the company at $1" (he basically calculated my total shares by assuming a total of 1 million shares). This would imply that "ownership" means stock.

    After some more research, it looks like "ownership" of an LLC can only equate to equity, not stock. Apparently stock is strictly for corporations. So with that in mind, I'm not sure what that document means... I guess it's worthless? Now, assuming that our "ownership" refers to equity, well, we should then have voting rights when it comes to management of the company (which we have never had).

    As for taxes - We've been told not to worry about it... So we've never gotten any tax forms or anything related to our ownership for tax purposes. Just our standard W2. I'm pretty sure that the only records of our "ownership" are on an excel doc somewhere, not on any official legal forms.

    Another complication: we've never once discussed vesting. I'd imagine that after 4 years it wouldn't be crazy to assume that everyone is fully vested, but it's never been discussed... so who knows.

    Hope I answered your questions clearly!

  4. #4
    Join Date
    Jan 2013
    Posts
    372

    Default Re: LLC "Ownership" and Missing Pay Situation

    Let's see. If the LLC goes broke, you get nothing. If you quit, you get nothing. If you stay, you won't get paid but may own "something", someday.
    Sharpen your resume, sounds like the LLC can't pay it's obligations. Find the letters and other documentation about your equity shares. Decide whether you should speak to a lawyer to figure out what you own and give him the documents. Call the Dept. of Labor about the lack of pay. Expect the LLC to crash and burn when the DOL comes calling. Sorry, but I think your sweat equity has little value currently and will have no value soon.
    You know more about this company than I do. Do you think that this is a brief biz problem or are they going bust?

  5. #5
    Join Date
    May 2014
    Posts
    3

    Default Re: LLC "Ownership" and Missing Pay Situation

    Thanks for the input, I appreciate it.

    I think you've pretty much summed it up. I expect the company to continue limping along for the foreseeable future, missing paychecks here and there as usual. Management isn't changing it's method of operation. There's always a chance of making a hit and getting a big pay day, but that is like winning the lottery.

    I guess my real questions now are, what are the legalities around equity in an LLC?

    ie:
    What are the company's rights over an individuals equity?
    What are the individual's rights?
    As far as the "you can't own equity if you're not an employee" line, how would that work if an external investor bought an equity stake? Is the investor an employee somehow?

    Thanks again,

  6. #6
    Join Date
    Jan 2006
    Posts
    38,867

    Default Re: LLC "Ownership" and Missing Pay Situation

    You need to make up your mind/

    either you were paid with equity or you are owed money. It can't be both (at least for the time you were earning shares of the company)

    there is nothing requiring an owner of an LLC to be employed by the LLC

  7. #7
    Join Date
    Jan 2013
    Posts
    372

    Default Re: LLC "Ownership" and Missing Pay Situation

    I'm sorry but you do not seem to know or understand what your company's sweat equity policy is. There's no special law that's involved, it's a contract. If the company has value then taking the contract or company policy and other documentation to a lawyer makes sense. If the company has little value then your sweat equity has little value, most likely.
    As I said previously this company has not been paying it's employees and seems to be badly organized. Should someone complain to the DOL, the company and your sweat equity may cease to exist. My advice is that you begin job hunting and file a complaint with the DOL.

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