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    8 Replies Latest reply on Dec 15, 2008 7:14 PM by DSTREET1

    Advice on legal structure setup


      My company (a C-corp) is in the process of acquiring a services business. To be able to purchase the business, we are raising capital through investors - friends, families, etc since the typical lending route is getting tougher with this economy. This is how we are planning to set this up legally.

      1. The C-corp will acquire and own the business
      2. We'll setup a separate LLC. Each potential investor will be a partner in the LLC
      3. We are offering guaranteed returns on the investments of the investors over a 5 year period. Interests are paid out semi-annually, and the principal investment is returned at the end of the 5 years.
      4. The LLC's sole purpose is to invest in the C-corp
      5. The LLC's investment in the C-corp will be bonds.
      6. The C-corp has 2 shareholders - me and another partner, and the bonds that will be held by the LLC


      1. Since the LLC will be investing in bonds of the C-corp, does that mean that each partner/investor of the LLC will owning "bonds" of the LLC, or can we offer them "shares" of the LLC?
      2. Can the general manager of the LLC be a shareholder of the C-corp?
      3. If question #2 is possible, does the general manager have to contribute/purchase shares in the LLC to represent his/her stake in the partnership? in other words, if we are raising $1,000,000 for the project, and we'd like the investors to represent a 40% stake in the LLC and the general manager having a 60% stake, does the $600k have to come from the general manager? Can we still raise the $1M and still reflect that as only a 40% stake in the LLC?
      4. After 5 years, the C-corp would have paid all the interest and principals of the LLC investors. Does that mean that the bonds held by the LLC have been sold back to the C-corp at that point? Or are the bond quantity being reduced semi-annually since the C-corp is paying interest to the LLC?

      Apologies if some of this is not accurate/correct. I am trying to learn the legal aspect of this setup.

        • Re: Advice on legal structure setup
          LUCKIEST Guide
          Advice on legal structure setup, Welcome 30


          Your company is in the process of acquiring a services business.
          Do you have both an Accountant and a Lawyer?? Now is the time for a Rrofessional to help.

          "Apologies if some of this is not accurate/correct". Lawyers and Accountants are both accurate and correct.
          "I am trying to learn the legal aspect". If you are not a Lawyer, you should not be trying to learn LEGAL


          • Re: Advice on legal structure setup
            Bridge Navigator
            My I ask why you are setting up an LLC rather than having the C corp. just issue notes (i.e. loans) to the investors?
            • Re: Advice on legal structure setup
              GrowthCurve Adventurer
              I don't understand why you are contemplating such a convoluted structure.

              #1. It's up to you whether your LLC investors will be creditors or equity holders in the LLC. It's possible that the LLC could just owe them money, and it's possible that they could be owners of an equity interest in the LLC. I guess it depends on which entity is making the guarantee. If the LLC is making the guarantee, then I think the LLC would be taking a loan from the investors.

              #2. Sure, there's no reason a person can't have a stake in both entities, but you had probably better disclose all of this.

              #3. You could sell a 40% stake in the LLC and keep 60% for yourself, but what investor in his right mind would go for that? Your corporation sells $1 million in notes, and then your investors in the LLC would have equity worth only $400,000. If I were an investor and read that in your offering materials, I'd think you were either dishonest or -- with all candor -- not very smart.

              #4, The bonds have not necessarily been "sold back," they have just been paid off. The principal of the bond is reduced only to the extent that your payments have exceeded interest. If you are making interest only payments, then your principal will not be reduced.

              As the previous response said, why not just let the corporation issue notes?
              • Re: Advice on legal structure setup
                Lighthouse24 Ranger
                In what state is all this taking place (where are the C-corp and LLCs being registered)? Are there potentially any foreign investors involved? State law covers a lot of what you're asking about, and the laws that regulate corporations, LLCs, and the sale of stock or other securities are not the same everywhere. I think you'll have to provide a few more details to get a definitive answer. Welcome to the community and best wishes.
                • Re: Advice on legal structure setup
                  Thanks for all the replies.

                  We thought of having the C-corp issuing notes/loans, but our accountant suggested we set it up this way so that the investors can bear some risks, which we all are. If it was a loan, wouldn't we have to be binded to keep paying even if the company was in a difficult financial situation. With this setup, we can stipilate in the operating agreement that we can postpone the interest payments if there is an economic hardship, and resume after the company recovers.

                  Also, by not dealing directly with the C-corp, it shields us from investors wanting to directly have their hands on our operations, etc.

                  The C and LLC are setup in NJ.
                    • Re: Advice on legal structure setup
                      Bridge Navigator


                      Based on the information you provided, I am not sure how having an additional corporate layer reduces/increases risk? You can address any payment concerns in the loan covenants; i.e. when payments might stop, penalties, etc. It sound like you know the people investing/lending and they know where the money is going. If they want to ask questions about the business performance, they will. And, if you are taking their money, don't they have a right to know?

                      Does your accountant have experience in setting up financial instruments or is his speciality general small business accounting; i.e. payroll, taxes, etc.


                      As a side note, very few people will lend money "blind" and whether it is debt or equity, they will want to know where the money is going, how it is and how it is being used.


                      Debt is normally considered the least risk, has first priority over most other obligations, and has lower rates of return.

                      Equity offers more risk on payback, takes a subordinated position to debt obligations and hence usually offers higher returns.

                      Their are multiple types of debt and equity structures as well as hybrid financing instruments. First, you should decide exactly what you are offering/want to accomplish and then develop a financing proposal around that.


                      Best of luck,


                    • Re: Advice on legal structure setup
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                      • Re: Advice on legal structure setup
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