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Richard - Bizlaw
Richard - Bizlaw, Attorney
Category: Business Law
Satisfied Customers: 8786
Experience:  30 years of corporate, litigation and international law
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I am looking at getting a financial investment in my LLC partnership

Customer Question

I am looking at getting a financial investment in my LLC partnership coming from my family (dad and godfather). Both live abroad -- one in Kenya and the other in New Zealand. We have a Los Angeles based LLC that is a partnership filing as an S entity.

The investment is a large amount of money -- approximately $250,000 and would be being put in on my behalf (I would end up owning their shares)

Currently, I own 50% of my business and my partner owns 50%. We are planning on changing this structure to accommodate vesting in a new partner. After this investment money is put into the company, the breakdown would be 51% for me, 25% for my business partner, and 24% remaining to vest the new partner in over 3 years (with a 1 year cliff).

My question relates to the legalities and accounting matters to be taken into account with this investment money. What is the proper way to get this money into our bank accounts and account for it legitimately. The investment would essentially be a gift to me so that I would takeover 51% of the ownership and my partner would get diluted to 25%. He is totally on board with this, we are just trying to figure out the way to get this done properly without tax implications for my Godfather and father etc.

Advice would be greatly appreciated.

Jason
Submitted: 3 years ago.
Category: Business Law
Expert:  Richard - Bizlaw replied 3 years ago.

bizlaw :

Are your relatives the 24% members or will this third investor be a new person? Will you have a repayment obligation to your relatives?

Customer :

Basically the capital investment will be contributed on my behalf, giving me 51% of the company... relatives aren't interested in being officially on the books and want to minimize or avoid altogether having to pay taxes in the US (the live overseas)...

Customer :

And I will have an understanding with them that with my 51%, when the company is sold, they will be considered in what I make out with...

Customer :

No repayment obligation whatsoever... just I will have an understanding with them that they "virtually" own some of my 51% but not legally/officially...

Customer :

Hello? Did I lose you?

Customer :

Seems like I lost you

bizlaw :

I was off line so I am back. The funds from your relatives should go into your personal account first and then you will invest in the company. Then you and your partner would have an agreement taht you would make your investment and bring in an investor. You will end up with the percentage interests you indicated. Ideally, the capital accounts in the LLC will match up. I do not know enough about the current value of the business or the investment the other investors will make to be able to say this will be the case. if not you cannot match up the capital accounts you can alter the operating agreement so that based on the investment you will receive 51% of the profits and losses, your partner 25% and the new investor(s) 24%. Profits and losses do not have to be allocated on the basis of capital accounts. On liquidation you get what is in your capital account.

If this answer is responsive to your question, please accept it. That is how we are compensated. It would also be appreciated if you provided feed back on your view of the answer. Finally, if the answer was especially helpful you can provide a bonus. If I can be of further assistance or you have other questions in the future you can ask for me and reach me at this site.

This communication is not intended as legal advice. A local attorney should always be consulted for legal advice. No client/attorney relationship is intended or created by this communication.

Customer :

Ok, I want to make something clear... the partner being vested in has nothing to do with this money coming in...

Customer :

This is an individual we want to bring on board... already have, just figuring out the right vesting structure...

Customer :

So the investment money will be being put in by me, having gotten it from my relatives, they will not legally own any part of the company... I will just have an understanding with them that my 51% partially belongs to them...

Customer :

When I sell the business a few years from now...

Customer :

They will get a chunk of change...

bizlaw :

I understood the new 24% partner was different. Here is what I was talking about. Lets assume the business is worth $100,000 of which you and your partner each on 50% so your capital accounts in the LLC are $50,000 each. If you invest $250,000 with nothing else, the total capital would be $350,000 of which $300,000 would be in your capital account or 85.7% of the total equity. Yet you are only getting 51% of the LLC. Normally, profits and losses are allocated in accordance with the capital accounts but they do not have to be. In this case you could have profits and losses allocated 51% to 49% even though the capital accounts are much different. Under the allocation of profits and losses based on the percentages and not the capital accounts, what happens is if you have $100,000 of profits you would have $51,000 added to your capital account (it would now be $401,000) and your partner would get $49,000 and his capital account would be $99,000. I hope that clarifies what I was trying to explain.

If this answer is responsive to your question, please accept it. That is how we are compensated. It would also be appreciated if you provided feed back on your view of the answer. Finally, if the answer was especially helpful you can provide a bonus. If I can be of further assistance or you have other questions in the future you can ask for me and reach me at this site.

This communication is not intended as legal advice. A local attorney should always be consulted for legal advice. No client/attorney relationship is intended or created by this communication.

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