We are often asked: “How do we bring a new investor into a San Diego LLC? Your company is positioned to grow and you simply need the working capital into the LLC in order to expand and capitalize on this opportunity.” This question is usually followed with something to the effect of “…and we want to make sure we have control over the company and all of the business and financial decisions!”
Central Issues to Consider as You Bring a New Investor into a San Diego LLC
When a business is growing and expanding and seeking new investment it is an exciting time for all involved. It is a common practice for LLCs to seek additional “members” (investors) to bring needed investment capital, business expertise or both into the company. The central questions are:
- How is their investment secured, and how will they benefit from this investment, and
- What rights, if any, do they have in the voting, decision making, financial and operational aspects of the LLC?
The questions for existing members in the LLC should be focused on:
- How will the LLC benefit from new investment?
- What are the potential consequences for adding new capital or member(s)?
- What are the tax consequences of adding another member and additional investment to the LLC?
If the investor is going to become a member in the LLC they may be prepared to offer contributions which will help the LLC to grow or increase profitability. However, this can also diminish the profits to be shared between the original members. The existing team should consider the impact of a new vote and how to handle the impact of ending this new relationship if and when things don’t go as expected.
Amending Existing Corporate Documents
In most cases, when you bring a new investor into an LLC it will require an amendment of the operating agreement. If there is no operating agreement in place, or if it was a boilerplate agreement (such as a downloaded form) a new operating agreement may need to be drafted.
What percentage of the LLC will each resulting member own? How will profits be distributed and losses be managed? What are the expectations if there is a need for additional capital contributions? Is it legal to make a new member a non-voting interest or limit the value of their vote when compared to existing members?
It is important to note that some states require an LLC to be dissolved and reformed if there is any change in the members who own it. Where was your company formed (in other words, under what state was the LLC established)?
You Need the Advice of the Proven Business Attorneys at the Watkins Firm
The process of how to bring a new investor into an LLC carries substantial legal, organization and financial risks and potential benefits.
If you are bringing new investors or members into your LLC we invite you to review the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today. We will discuss the specifics of your LLC, the players involved, the money, voting and operational duties and develop a sound budget for the development of your operating agreement. We will help you to understand all of the nuances of these agreements, and how to ensure that your position is protected (or enhanced) while bringing new partners into your business.
