I was laid off from a corporate job earlier this year, and am thinking about buying a franchise.  I have very little savings, but my current boyfriend has more than enough money to pay the franchise fee and the other upfront expenses.  This is going to be primarily my business -- my boyfriend is willing to work in the business, and says he has no problem working as my subordinate.  But we’ve been having issues with our relationship, and I’m pretty sure we will stop dating over the coming months.  Believe it or not, I don’t think that will affect our ability to work together in the franchise, as we’re both very rational people and I think we can separate our business lives from our romantic lives.  We are planning to form a limited liability company (LLC) to operate this business.  What is the best way to set this up fairly for both of us given our situation?

A couple of observations right off the bat:

-  since your boyfriend will be putting in virtually all the money to buy and set up the franchise (or so it sounds), he certainly will want some sort of return on his investment, whether or not you break up; and

-  since you are buying a franchise, if you and your boyfriend are partners in the business then both of you will be required to personally guarantee your LLC’s obligations under the Franchise Agreement and other documents you will be required to sign with the franchise – if you break up and he leaves the company, he will still be personally “on the hook” for any debts or obligations that the LLC may incur.

There are two ways you might want to set up this LLC, and I would discuss them with your lawyer as soon as possible:

Option # 1.  Your boyfriend could loan the startup capital to your LLC (NOT to you individually).  Your LLC would promise to pay the loan back “interest only” for the first two years – to give the business time to grow – and then amortize principal over five years at today’s low, low rate of interest (say, three percent).  In addition, your LLC would sign an Employment Agreement with your boyfriend, with a clause saying he is an “at will” employee and can be fired at any time, with or without good cause.

The advantage of this approach is that your boyfriend will not legally be your partner.  Your business will get the benefit of both his capital and his expertise, but you are calling the shots – you can terminate him if you break up with him.  Also, he will not be required to personally guarantee your LLC’s obligations to the franchise, although as an employee he may be required to sign a confidentiality or noncompete agreement on the franchise’s standard form. 

The downside is that your debt to him must be paid every month without fail – otherwise he can put you in default and take over your business.

Option # 2.  Your boyfriend would use his money to buy an ownership percentage (less than 50%) in your LLC.   As in Option # 1, your LLC would sign an Employment Agreement with your boyfriend, with a clause saying he is an “at will” employee and can be fired at any time, with or without good cause.  Then, your attorney would draft a special clause in your LLC Operating Agreement (basically a partnership agreement between you and your boyfriend) saying that if his Employment Agreement terminates for any reason, you would buy back his ownership interest in the LLC for a purchase price equal to the total amount he initially put into the LLC less any distributions he has been paid since the LLC was formed.  As in Option # 1, this purchase price would be treated as a loan to the LLC (not to you personally).  Your LLC would promise to pay the loan back “interest only” for the first two years and then amortize principal over five years at three percent simple interest.

The advantage of this approach is that you will not be obligated to repay your boyfriend’s capital contribution as long as he is actively involved in running the business.  The disadvantages are (1) that you will have to give up some control of the business to him (you will legally be “partners”), and (2) he will be required to personally guarantee the LLC’s obligations to the franchise.

Give this some serious thought.  I realize romantic relationships are a lot more “snap on, snap off” than they used to be, but you shouldn’t assume it will be “business as usual” once you break up with your boyfriend.  Changes in relationships often change the people involved, and he may exhibit a different personality once he’s no longer your lover, especially when he finds a new girlfriend and wants to bring her into the business.

Cliff Ennico (cennico@legalcareer.com) is a syndicated columnist, author and former host of the PBS television series 'Money Hunt'.  This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state.  To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com.  COPYRIGHT 2009 CLIFFORD R. ENNICO.  DISTRIBUTED BY CREATORS SYNDICATE, INC.