I am forming a US LLC with foreign partners who used to sub-contract
to me. At the moment, the US Dollar is almost at a 30-year low
relative to their currency. As the US economy improves and our Dollar
becomes stronger, their 50% share in the profits of the US company
will be worth more and more back home overseas, while my 50% share is
only going to be worth its face value. Is it sensible, possible, and
even acceptable in business to structure our profit sharing in such a
way that it is sensitive to exchange rates, such that they and I
retain about the same *purchasing power* out of our shares in the
profits, rather than merely share the profits 50/50 in US Dollars? If so, how?

Your concern is actually pretty unusual based on my research. 
Typically, in a partnership such as yours, it is desirable to be the
party whose home currency is the one the profits are denominated in. 
This eliminates exchange rate risk, making the profits from the
enterprise less volatile.  While the other party could benefit if the
dollar rises, they will be hurt if the dollar falls.  Typically,
companies hedge against dramatic changes in profitability through
foreign exchange contracts.  These cost money even if they completely
mitigate the risk (assuming the other party performs), so it is
preferable to not have to deal with any of this.

Because your partner could lose or gain based on changes in exchange
rates under a typical agreement, whereas you would not, it is
surprising that you would be interested in entering into an
arrangement that would increase the volatility of your share of the
profits.  You seem to believe that it is certain that the US dollar
will rise.  If you are that certain, there are better ways to address
the situation than by entering into a contract where you will lose if
the dollar loses value.

While I could not find a direct precedent for what you are proposing,
I did locate an arrangement that ExxonMobil has entered into wherein
the profit division formula varies based on the price of oil.  You
could structure an agreement on that basis with the profit division
formula varying based on the dollar exchange rate.  However, you are
either assuming risk of the dollar falling or you will be unlikely to
get your partner to agree if you prevent them from enjoying the upside
but do not share the risk of the downside.

It is important to remember that as the dollar rises, your purchasing
power inherently increases to the extent that you purchase imported
goods.  Another consideration is how much of your company's revenues
will be denominated in the foreign currency.  If you do not hedge
those foreign currency receipts, then your US dollar profits will
decrease with a rise in the dollar's value and increase with a fall in
the dollar's value.  Therefore, as the dollar rises, you would pay out
less to your partner and if the dollar falls, you would pay out more
to your partner, even if the profit sharing percentage remained
unchanged.  This would not be true if you hedged your foreign currency
transactions and would be dependent upon you converting the receipts
in the foreign currency to dollars as you receive them.

If you are convinced the dollar will rise with respect to the foreign
currency, you could "go long" the dollar by buying US dollar futures
contracts.  These will be worth something if the dollar rises, but you
only risk losing your purchase price if it does not or falls.  That
way, you will benefit if the dollar rises but not be hurt much if it
falls.  Furthermore, you can accomplish this completely independently
of your contract with your partner.

Sources:

"Foreign Currency and Exchange Risks" Business Link (2005)
http://www.businesslink.gov.uk/bdotg/action/layer?topicId=1074298334

"Finance Director's review" by Andrew Shilston, Rolls-Royce (2003)
http://www.rolls-royce.com/investors/reports/2003/financedirectorsreview.html

"Collaboration Agreement Between Eli Lilly and Company and Amylin
Pharmaceuticals, Inc." (September 19, 2002)
http://www.pharmaventures.com/ag_demo/contract2_11452.pdf

"RI, EXXON AGREE ON PROFIT SHARING SCHEMES ON CEPU BLOCK" ANTARA News
(June 23, 2005) http://www.antara.co.id/en/seenws/?id=4616

"Contract Specifications: U.S. Dollar Index" New York Board of Trade
(April 22, 2004) http://www.nybot.com/specs/dx.htm

Sincerely,

Wonko

Search Terms:  "profit sharing" "foreign exchange" partnership;
"division of profits" "foreign exchange"

: mechapes-ga

Wonko-ga has discussed many points raised by your question.

Normally company distributions are made to members (partners,
shareholders) based on their capital participation.  LLCs can be more
flexible on this, probably in all states, not just in Delaware.  Here
is the law there:

http://www.delcode.state.de.us/title6/c018/
See sub-chapter VI

Perhaps your foreign partners would agree to an arrange such as you
suggest, and I can understand your feeling that they may be getting a
good deal  - IF the dollar recovers.  On the other hand, if this
occurred, you would be be reaping a greater proportion of the LLC's
profits as the result of something that had nothing to do with the
operation of the company.  To me, that seems unfair, since most people
would feel that distribution of income from a company should relate
solely to the company's activities.  Your proposal could lead to
differences with your foreign partners (who would presumably still be
providing services to the company) which could be detrimental to the
company's activities.

This site may also be of interest:

http://www.mitforumcambridge.org/knowledge/FDMLLC.html

Myoarin