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Multiple Businesses on eBay, with Different Owners

Q: "I have a corporation that runs my eBay selling business. I've been approached by a leading Web designer in our area, and we're thinking of going into business together to design eBay Stores for people. Should I offer her shares in my corporation, and if things don't work out, how can I legally get rid of her?"

A: Whenever you're thinking about bringing a partner into your business, keep this one thing in mind: If things don't work out with that partner, there is only one way you can legally get rid of him or her. That is to buy the person out, for whatever price he or she is willing to accept. You can't just tear up the person's stock certificates and pretend that nothing had ever happened.

It sounds as if you don't know this person really well. If that's right, then don't give her any shares in your corporation, because by doing that she is legally entitled to a percentage of all your eBay selling profits, not just the profits from your eBay Store design business. Unless she is willing to roll up her sleeves and help you create listings with Turbo Lister 2, she shouldn't be entitled to any piece of your eBay earnings.

I recommend that you form a separate limited liability company (LLC) for the eBay Store design business, so that business is kept separate from your existing corporation. Then offer her a small ownership percentage (not more than 25 percent) of the LLC, with the understanding that as the LLC business reaches certain agreed-upon revenue or profit levels (called milestones), she will be entitled to additional percentages until she is your 50 percent partner.

Such an arrangement (called an earn-in) would look something like the following in your LLC operating agreement:

The parties agree that Mary will initially receive a 20 percent membership interest in the Company, provided that Mary will be entitled to an additional 10 percent membership interest when the Company has earned $100,000 in aggregate revenue with a gross margin of at least 30 percent, an additional 10 percent membership when the Company has earned $250,000 in aggregate revenue with a gross margin of at least 20 percent, and an additional 10 percent membership interest when the Company has earned $500,000 in aggregate revenue with a gross margin of at least 10 percent; provided, however, that under no circumstances will Mary be entitled to receive more than a 50 percent membership interest in the Company.

Building a Holding Company Structure

Q: "My brother and I have been selling merchandise on eBay for the last few months and would like to establish a business formation. Once we have formalized our company, we plan on creating and utilizing our own website. Our website will have items for sale in addition to links to our active eBay auctions. Our auctions have consisted primarily of the resale of women's clothing and accessories (similar to an online consignment, but we are purchasing the items from individuals and then looking to flip them on eBay for a profit.) We hope to expand our sources for merchandise in the future. "We were thinking to establish a parent company, and we would like to have the ability to create subsidiaries that fall under the umbrella of the parent company. For example, we would like our website to have a different, jazzier name than that of the parent company. Our view is that down the line we might want separate entities that will focus on different things. In the future we might look into opening a small storefront or showroom specific to our product lines that will complement the website. Is this the best way to go about setting up our eBay business?"

A: This is called a holding company structure, and it is a very common way to organize a large-scale eBay selling business dealing with multiple product lines both on and off eBay.

You begin by forming a Subchapter S corporation or limited liability company (LLC) that is merely an umbrella—it owns shares in all the underlying companies that actually buy and sell on eBay, but the parent company itself does not engage in any real business. Then you set up operating companies (either LLCs or Subchapter S corporations if they are each 100 percent owned by the parent company) that engage in the actual buying and selling of goods on eBay, own the website, and engage in any related business activities.

Since forming corporations and LLCs is expensive, and the legal paperwork involved in operating multiple corporations can take up tons of management time that is better spent getting stuff sold on eBay, you may want to consider starting out with just a single corporation or LLC (the parent) and filing trade-name or "doing business as" (DBA) certificates (see Chapter 2) for each line of business you wish to engage in. Then, as the business grows and you can afford to deal with the paperwork this structure entails, you can form new corporations and LLCs, and have the parent company buy stock in each of these subsidiaries in exchange for the assets of one or more of your business lines.

Sound complicated? It is. Don't even think about building a corporate structure like this without the help of a good lawyer, a good accountant/tax adviser, and at least a few employees who can handle some of the grunt paperwork that needs to be done to keep track of everything.

 
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