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So, me and two other guys from work have been doing some moonlighting on the side together. We are half way through our first job. The first job is for 15K. Initially we were going to start an LLC together as three equal partners, but at our most recent meeting one of the guys wanted to just have it in his name because -- as he told us - if we moved away he could still have the business. Back story: it has always been a dream of his to own his own company, etc (as he has told us). It is so early in our moonlighting phase, that me and the other guy weren't sure what to say.

I am not familiar with the pros and cons of this kind of situation, so any help would be appreciated.

Also, the 15k he wants to split like this:

$3750 for him. $3750 for me. $3750 for the other partner and then $3750 goes into the LLC bank to cover, I guess taxes and what not? So, he would get $3750 as payment for work done and then another for his LLC biz. So, is that like he is getting paid double us ($7500)? Or am I understanding this wrong or something? If he is getting paid double, is it deserved maybe (e.g., like he is taking more risk as an LLC or something, or there are so many taxes on an LLC, that it would drain the account of that money anyway)? I guess we would function as employees / contractors too. Would we still have to pay taxes as employees or would that already be down through the LLC? Again, total newb to the business / legal world, so any help appreciated.

Also, this is just a hypothetical question: if we were to each just split it, say, evenly three ways we would each get $5000. Would me and the other guy -- who would not be a partner in the LLC anyway -- make more money, less money or no difference in money than if we go through his LLC?

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    VTC: You (probably all of you) all need legal and financial advice urgently, but that advice is off-topic for this group. – PeteCon Feb 19 '17 at 2:59
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    I think startups.stackexchange.com would be a better place for this question. – Mel Reams Feb 19 '17 at 3:19
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    "one of the guys wanted to just have it in his name because if we moved away he could still have the business" - What if he moved away? – A. I. Breveleri Feb 19 '17 at 4:09
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    Propose the same thing back to him, record his answer, and then play it back to him as your answer. – acpilot Feb 19 '17 at 5:14
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    Your situation is very hard to read. You are midway through being conned. You made need a lawyer already particularly depending on how the payment of the $15k is disbursed. If your con partner hears the depth of your legal ignorance he will likely make up further legal threats to get more of the money. It may be easier if that money never exists, i.e. quit now. Consider going into business with the honest one starting next deal. Or he might not have thought about any of this but expect tensions to rise... – user42272 Feb 19 '17 at 6:14
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Finish the job, split the $15000 equally three ways, and never talk to that jerk again.

You are dealing with a fast talking con man who will be as rich as Croesus some day, and he will do it mostly by paying other people less than they are worth. The mere fact that he would even propose such an unconscionable division of the proceeds of the labor of the three of you is a klaxon alarm warning you off signing any arrangement with him.

You would actually be better off paying someone $1250 to follow you around and slap your hand away whenever you tried to sign an LLC agreement like that. You would still end up with only $3750 instead of $5000 but at least you would not have to be ashamed of your gullibility.

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Here is how it would be done correctly: You start an LLC, with each partner holding an equal share. You split the money that you have three ways ($5,000 each way), then each one gives a loan of $1,250 to the LLC. That loan would be repaid as soon as the company has made some money.

If one day the two of you want to move away, the third one can buy your share of the company. You would then have to determine how much the company is worth - if you just used it as a vehicle to do your moonlighting in a tax efficient way, the company itself may not be worth much at all.

What he is suggesting is apart from the fact that he most likely wants to con you, a very inefficient way to run your moonlighting business. You usually use an LLC to pay a small salary, and pay dividends from the profits of the company. If there is one owner only and three people, that doesn't work. The LLC would have to pay you your full salary, with full taxes paid, and there would be no tax savings.

But if you want to start an LLC with more than one partner, everyone needs to be able to trust each other. Sorry to say, you can't. It's up to you whether you trust colleague #2, but the third one cannot be trusted. I can promise you that he will do something to con you. Don't do it.

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  • Hey @gnasher729, he mentioned that we would probably get taxed a 30% or more on the 15K so he wanted money in there to cover the taxes (and the cost of the LLC). Does that seem to make sense or no? – Scott Girly Feb 19 '17 at 18:36
  • @ScottGirly No. But again, you need to seek legal advice and read up on LLC accounting practices, which is out of the scope of this site. The upshot is that before you make one dime you should have agreements in place about how much the company will maintain for overhead (e.g. expenses), and how the income will be disbursed. If your take from the job is $15,000, then realistically you can't expect each person to get $5000, because the business does have expenses. But it can't be that one person gets all the money and decides the rest post facto. – Paul Feb 19 '17 at 21:13
  • Also, if the company wasn't in place before the job started (and you're US based, which isn't clear from the question), you should just take the income three ways as 1099 income (i.e. individual), and then make the company afterward. – Paul Feb 19 '17 at 21:14
  • We are U.S. based and the company was NOT in place before we started the job. – Scott Girly Feb 19 '17 at 22:19
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Just refuse. Nothing in this deal protects you or benefits you. Without that all other details are a waste of time even contemplating.

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