Structuring Your LLC to Attract Investors - dummies

By Jennifer Reuting

More often than not, upstart capital for budding enterprises comes from the founders and people willing to finance it for a piece of the action (otherwise known as investors), which is why raising capital is a vital aspect of any up-and-coming business. Unlike sole proprietorships or general partnerships, limited liability companies (LLCs) can actually sell portions of the ownership, the membership shares.

Membership shares are normally given to investors in return for cash, property, or other assets. You can also give them to employees or contractors in exchange for their services. Issuing membership is a great tactic to use if you’re just starting out and don’t have a lot of money to pay employees.

In some states you can give promissory notes for future money, property, or services that someone intends to contribute. That way, you can issue the shares first, and then the person can make his contribution. You can always note in your operating agreement that if the individual doesn’t live up to his promises, his shares are confiscated.

Promissory notes can be a big incentive for investors to get on board, but be careful! Make sure the investor does in fact have the money to invest and is committed to living up to his end of the agreement.

One of the reasons LLCs are quickly becoming the entity of choice for raising money is because they provide unmatched limited-liability protection for everyone involved in the business. Not only are the members protected from the liabilities of the business, but LLCs also get the benefit of charging order protection — a second layer of liability protection that protects the business from the liabilities of the owners.