Are you searching for information on how to bring a new investor into your LLC in San Diego or anywhere in California? Your company is positioned to grow and you simply need to add working capital or business expertise 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 retain control over the company and all of the business and financial decisions!”
Key Takeaways on How To Bring a New Investor into Your LLC in San Diego or Anywhere in California
- What is a MIPA and why is that an important element in the equation of bringing in a new investor for your LLC?
- How is the investment of the new investor to be secured, and how, specifically, do they intend to benefit from the investment in your company?
- It is important to work with an experienced business attorney who can help to organize the process, paperwork, and structure to accomplish the value of the new addition, without risking control of the company.
Central Issues to Consider as You Bring a New Investor into a California 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.
What is a MIPA? Why is This Document an Important Element in the Equation of Adding a New Member to Your LLC?
A Membership Interest Purchase Agreement (MIPA) is how an ownership interest in an LLC (or ownership of the LLC itself) is passed on to a new member. The MIPA will structure the terms of the transaction, the responsibilities of all parties and the LLC itself, as well as distribution of profits or benefits to be derived from the addition of a new member.
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)?
Pro-Tip: “So five buddies want to get together and buy a bar. They can have an agreement that they all sign that has a lot of, ‘what if this happens, what if that happens and who gets what money?’ Because sometimes you have sweat equity, you have one guy working the bar all the time and the other guy’s just drinking. So you can have it written in into your operating agreement that the guy who works harder, even though he didn’t invest, or we all invested the same, can get more money.
The acquisition of a membership interest in an LLC, or the entire LLC itself is actually quite legally and financially complex. Any corporate entity, such as Limited Liability Corporation, exists to separate and protect the assets and interests of its owners (individual members or shareholders) from the debts and obligations of the corporate entity itself.
Business is all about risk and reward. In order to take the necessary risks, the owners of the corporate entity are able to legally separate their own personal assets and debts from any accounts, obligations, or creditors of the corporate entity. If a creditor wishes to pursue the owners of a corporate entity (individual members or shareholders) personally for the debts or obligations of the entity itself, they must “pierce the corporate veil” and clearly demonstrate there is no “actual legal difference between the corporate entity and the individual entities that own it.” The act of piercing the corporate veil exposes all personal assets and interests of the member or shareholder in order to satisfy the debts and obligations of the corporate entity. This is why a corporate entity such as an LLC exists, to provide the legal and financial separations between the corporate entity and its owners.
This is also why you need an experienced Mergers and Acquisitions (M & A) attorney to Complete a MIPA transaction. The seller wants to make sure they are able to transfer their membership in the corporate entity for some consideration, and then move on (without any future obligation) from that transaction. The buyer needs to make sure they are fully aware of every aspect of the membership interest they are acquiring, and that of the LLC itself, and to ensure the Membership Interest Purchase Agreement or MIPA is structured to manage every detail necessary to legally and financially transact ownership of that membership interest from the seller to the buyer.” – Dan Watkins, Founding Partner
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 our podcast Episode 34 – Business Formation as well as 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.
Meet Daniel Watkins:
Daniel W. Watkins is a true people person who sincerely listens. He cares deeply about what others are going through. Dan enjoys digging into the facts and finding creative solutions to problems. He contributes his insights candidly and constructively.
Dan’s interest in people make him deeply invested in every relationship and his exuberant personality makes him a true litigator. Dan fights for his clients with a fierce and calculated commitment.
Dan has practiced in the areas of business, medical practices and healthcare business, high tech/science, real estate and employment defense law since 1987. He is a trusted litigation strategist and true trial attorney with over 50 jury and bench trials to his credit. Dan has successfully represented both large companies and individuals and achieved substantial victories in well-publicized trials throughout California and the U.S.
He is experienced in business and corporate formation and administration, as well as all forms of alternative dispute resolution, including binding arbitration and mediation.
THE ROAD TO BECOMING A BUSINESS LAWYER AND LITIGATOR
Dan has almost 40 years of experience working with, for and against some of the largest insurance companies in the country. He has successfully tried and litigated cases in the areas of Healthcare Compliance, Commercial Litigation, Unfair Business Practices, Fraud, Breach of Contract, Battery, Premises Liability, Product Defect, Medical Malpractice, Discrimination, Sexual Harassment, Construction Defect, as well as Unfair Competition, Defamation, and Trade Secrets.
In December 2003, Dan commenced litigation against Health South Surgery Centers-West, Inc and its’ subsidiaries, exposing the company’s extensive mismanagement and misconduct of its’ surgery centers. Dan has also been asked by some of California’s largest municipalities and corporations to conduct legally required investigations into matters involving alleged employment discrimination and harassment.
