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Thread: If I Have Small % Owner's Equity in Biz, Does That Include Legal Liability? Delaware

  1. #1
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    Question If I Have Small % Owner's Equity in Biz, Does That Include Legal Liability? Delaware

    My question involves a new company being formed to operate a website. I believe it would be an LLC and not a corp. Not sure it would be a DE company, but I think so. Or possibly NV.

    The main contact person forming the company wants to buy something important from me to use in the business. I am considering asking for a small cash payment, and a % of "owner's equity" in the business, perhaps only 5%, plus a small % of gross revenue to be paid to me, perhaps 5% as well.

    I've never done this before and I do not know what all the legal implications are if I have an "owner's equity" stake in the business, but I know that deals like that do occur for the type of sale I may be making.

    If I do this kind of deal, would any "owner's equity" stake I receive also mean I have all the same legal liability the business would normally have for its actions and decisions, or does an "owner's equity" stake protect you from all that and simply mean you are entitled to a % of the value while having none of the liability?

  2. #2
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    As long as the entity is set up as a corporation or an LLC, you should not have any liability from your equity ownership as a passive investor. Those entities shield you from most types of liability. If you were actively participating in the management, it is possible that you could take actions which might result in your personal liability, but that would only be the case because you are acting in some other capacity, not as a mere owner of a small amount of equity.

    You do need to make sure that the business is formed as a limited liability entity such as a corporation or LLC. If the business is operated as a general partnership, you would be fully liable for any obligations of the partnership.
    David K. Staub (www.illinoisbusinessattorney.com)
    Forum posts are not legal advice, are for informational and educational purposes only, and are not a substitute for proper consultation with legal counsel.

  3. #3
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    Small correction - unless the guy is a complete idiot, in which case you don't want to be in business with him anyway, he would offer you 5% of the net income, not the revenue. Big difference, because if the business never turns a profit....also, even making a profit doesn't mean you automatically get a cash payout every year; that would depend on whether you and the other partners vote to pay yourselves a distribution or keep the profits in the business. Often a new business needs that cash.

    As dkstaub said, if you properly organize the business as a corporation or LLC, you should be protected from personal liability. That is the main reason to form that type of entity-to separate the business assets and debts from the owner's personal assets.

  4. #4

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    Quote Originally Posted by ferretrick View Post
    Small correction - unless the guy is a complete idiot, in which case you don't want to be in business with him anyway, he would offer you 5% of the net income, not the revenue. Big difference, because if the business never turns a profit....also, even making a profit doesn't mean you automatically get a cash payout every year; that would depend on whether you and the other partners vote to pay yourselves a distribution or keep the profits in the business. Often a new business needs that cash.

    As dkstaub said, if you properly organize the business as a corporation or LLC, you should be protected from personal liability. That is the main reason to form that type of entity-to separate the business assets and debts from the owner's personal assets.
    Thank you so much but I read the text a few times but I did not understand if you could give more explanations

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