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Richard, Attorney
Category: Business Law
Satisfied Customers: 53664
Experience:  32 years of experience practicing law and a businessman.
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This may be more of a finance question but, stock

Customer Question

This may be more of a finance question but, for private stock companies, I am learning more about what rights my investors may have.
My question is, if I bring on an investor for $100K for 10% of my company, for example, and the company nets a profit of $50K within the following 7 months, 'til the end of the fiscal year, what money if any do I need to pay to the investor? I understand agreements may be complex. I'm just trying to get a handle on the difference between the equity stake vs. distributions.
Submitted: 5 months ago.
Category: Business Law
Expert:  Richard replied 5 months ago.
Good afternoon Gary. My name is ***** ***** I look forward to helping you. Can you provide me a bit more information? What kind of entity is your company? Thanks.
Customer: replied 5 months ago.

Well, I have a legacy LLC separate company but created a new C Corp early last year. I haven't officially logged any revenue for that corp because I've been building a new product.

So, I'm gearing up to launch the new product and am considering various ways to obtain additional capital for go-to-market. Could be convertible note. Could be straight equity. But, considering options but was watching Shark Tank, of all things, and some of the deals were not just equity but also involved % of profits (in perpetuity or time ended) and amount of profit paid out.

I'm just not familiar with profit payments as I need to be and not sure where to go to get advise.

Expert:  Richard replied 5 months ago.
Thanks for following up. First, it's important to realize you have no legal obligation to distribute profits from the business. You may decide to build up reserves, pay down debt, or use money to expand the business. Your job is to maximize the value of your business, not insure there are annual distributions. If you are an LLC taxed as either a partnership or an S Corp, then the entity doesn't pay taxes and the net income/loss flows through to the owners. So, it's not unusual for the entity to distribute at least enough money to enable the owners to pay the taxes on these profits that are allocated to them. If you are a C Corp, the corporation pays its taxes, so this isn't necessary.

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