How do I limit the payout amount to an equity partner?

UPDATED: Sep 30, 2022

Advertiser Disclosure

It’s all about you. We want to help you make the right legal decisions.

We strive to help you make confident insurance and legal decisions. Finding trusted and reliable insurance quotes and legal advice should be easy. This doesn’t influence our content. Our opinions are our own.

UPDATED: Sep 30, 2022Fact Checked

Get Legal Help Today

Compare Quotes From Top Companies and Save

secured lock Secured with SHA-256 Encryption

How do I limit the payout amount to an equity partner?

If I receive a small amount of work in return for equity, is there a way to put a limit on how much that person can be paid in the future, or do I have to keep paying them forever? I know there’s a way to essentially buy back shares, however I would like to avoid a forced buy pack option. I would rather have some terms up front concerning what limitation a can place on future payouts if I feel that the work is too small or that this person will not stay with my company for the long run. How do I limit the amount

they can make from the equity or just place an option to buy back the shares without having to negotiate with them?

Asked on December 28, 2016 under Business Law, Florida


SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 5 years ago | Contributor

You can't limit what an equity partner receives from the sale of the business: i.e. if/when you sell it (or close it down and liquidate any assets and distribute any proceeds and money remaining in the bank account, etc.) they get a share proportionate to their ownership interest.
Howeer, you do not need to pay them reqular distributions IF you have an LLC and the operating agreement states that they do not receive distributions (or alternately, puts a cap on what they can receive)--that's because the LLC structure gives you considerable flexibility in ownership, in payments, etc. It just has to be in writing, in the operating agreement or a written amendment thereto.
If it's a corporation, then anytime there is a dividend, you have to give them their share--you cannot exclude or limit it, as with an LLC.
You can have a mandatory buyback. Overall, though, you are better off not giving them a piece of your business unless you expect the business to likely fail, in which case it does not matter. If you expect or hope to succeed, why give them ownership with all its complications and a piece or at least potential piece of the action for "a small amount" of work? Just pay them a wage or fee for their work.

IMPORTANT NOTICE: The Answer(s) provided above are for general information only. The attorney providing the answer was not serving as the attorney for the person submitting the question or in any attorney-client relationship with such person. Laws may vary from state to state, and sometimes change. Tiny variations in the facts, or a fact not set forth in a question, often can change a legal outcome or an attorney's conclusion. Although has verified the attorney was admitted to practice law in at least one jurisdiction, he or she may not be authorized to practice law in the jurisdiction referred to in the question, nor is he or she necessarily experienced in the area of the law involved. Unlike the information in the Answer(s) above, upon which you should NOT rely, for personal advice you can rely upon we suggest you retain an attorney to represent you.

Get Legal Help Today

Find the right lawyer for your legal issue.

secured lock Secured with SHA-256 Encryption